 House of Commons |
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 Committee(Morning)Tuesday 4 November 2008[Mr. Roger Gale in the Chair]Banking Bill10.30
am
The
Chairman: Good morning. This is the ninth sitting of the
Committee and we now come to discuss clause
1.
Clause 1Overview Question
proposed, That the Clause stand part of the
Bill.
The
Economic Secretary to the Treasury (Ian Pearson): It is a
pleasure to serve under your chairmanship, Mr. Gale. As you
are aware there are good reasons why we have only now reached clause 1,
but it is the meat of the Bill in terms of the special resolution
regime. I shall take a limited amount of time to set the scene because
clause 1 gives us a good overview of the framework of the regime
tools. The
clause sets out the broad purpose of the SRR, which is to address a
situation in which all or part of the business of a bank has
encountered or is likely to encounter financial difficulties. It
outlines the tools at the authorities’ disposal under the SRR.
The special resolution regime includes the three stabilisation options:
transfer to a private sector purchaser, to a bridge bank and to
temporary public sector ownership. As the Committee will hear when we
consider clauses 13 to 24 and 30 to 38, the stabilisation options are
exercised through the stabilisation powers, which effect the transfer
of shares and other securities or property, rights and liabilities by
operation of law. Those stabilisation powers include the onward and
supplemental transfer powers set out in clauses 25 to 29 and 39 to
41. Clauses
42, 43 and 55 provide for a package of safeguards relating to the
exercise of partial property transfer powers, which, as Members are
aware, proved of particular interest to stakeholders during the public
consultation process. I draw attention to the safeguards here because
the Government will be issuing a consultation document on them, as I
indicated in my letter to Committee members last week, as well as the
draft code of practice, which the Committee has seen, on Thursday of
this
week. I
have established an expert liaison group of banking sector
practitioners, including legal and insolvency experts, to advise the
Government on the development of the safeguards. The group held its
first meeting last Friday, and the consultation document that we
publish on Thursday will reflect its views on the Government’s
proposals. It will also have a key role in continuing
to
advise the Government through the process of consultation and beyond.
Yesterday I tabled a new clause on the position of the liaison group,
and we will debate that in due
course. Mr.
Mark Hoban (Fareham) (Con): It will be helpful to
Committee members if the Minister sets out who the members of the
expert liaison group are.
Returning to
the overview of the SRR, part 1 of the Bill includes provisions on
compensation, incidental functions, the role of the Treasury and how
the regime applies to building societies. The special resolution regime
also includes the bank insolvency procedure and the bank administration
procedure, which the Committee will consider when we come to parts 2
and 3. The special resolution regime outlined in clause 1 is at the
heart of the Bill; it establishes a permanent and credible framework
for authorities to resolve a failing bank. The SRR provides the
authorities with the tools to deal with banks in financial difficulty
in a manner that supports the public interest in financial stability,
confidence in the banking system and depositor
protection. In
most situations, normal regulatory interventions or voluntary action by
the management of the bank can resolve an individual bank’s
difficulties. However, bank failures will sometimes occur and can
damage confidence, disrupt financial markets, harm depositors and
generate significant costs to businesses and to the economy as a whole.
Bearing that in mind, it is worth taking a couple of moments to outline
the background to the development of the special resolution regime and
the genesis of this part of the Bill.
The recent
period of sustained disruption in global financial markets, starting in
the United States in the summer of 2007, has had a widespread impact on
financial markets, firms and economies across the world. In the UK, the
most visible consequence of that has been the financial difficulties
faced by a number of financial institutions, including Northern Rock
plc. In
summer 2007, Northern Rock found itself unable to finance its
activities, due, among other things, to a business model that was
heavily reliant on funding from the wholesale money market. In the
light of those severe difficulties, the Government took action to
maintain financial stability, while protecting consumers and the
interests of the
taxpayer. In
February 2008, when it became clear that, in the light of prevailing
market conditions, no institution was prepared to make an offer to take
over Northern Rock that was judged adequate to protect the taxpayer,
the Government took the decision to take the bank into temporary public
ownership. To that end, legislation to give the Government powers to
transfer the shares or property of a failing bank was brought forward
in the Banking (Special Provisions) Act 2008, which received Royal
Assent on 21 February of this year. The main transfer powers expire,
under the terms of that Act, on 20 February 2009. That Act provided the
Government with temporary powers should further action be needed while
permanent legislation—this Bill—was being prepared and
passed.
The prudence
of that approach has been demonstrated by events concerning Bradford
& Bingley plc. On Monday 29 September the Government used both the
share and property transfer powers provided by the 2008 Act to bring
the bank into temporary public ownership and then to transfer the
deposit book to a private sector purchaser. The special resolution
regime outlined in clause 1 replaces the 2008 Act with a permanent
framework for the authorities to resolve a failing bank, with
objectives that include protecting and enhancing financial stability
and confidence in the banking system, and protecting depositors and
public funds. Those objectives will be considered under clause 4. By
setting out a clear and credible statutory resolution regime to address
a failing bank, which removes control from the bank’s management
by overriding the powers of shareholders and directors, the regime also
provides a strong incentive for banks and their directors to take
action to prevent their business from getting into
difficulties. Unlike
the 2008 Act, the SRR has been designed as permanent legislation and
therefore provides a framework with strict conditions that must be met
before the powers are exercised, clear objectives that the authorities
must have regard to in exercising those powers, and refined
stabilisation powers that are targeted in their effect alongside new
tools such as the bank insolvency procedure. Clause 1 also establishes
that each of the tripartite authorities—the Bank of England, the
Treasury and the Financial Services Authority—has a role in the
operation of the special resolution regime. The powers and
responsibilities of those bodies are extended by the Bill, in line with
each institution’s current mandate and responsibilities, to
enhance the UK framework for financial stability and depositor
protection. The SRR also provides the authorities with a wide range of
tools to meet the above objectives, by resolving a failing bank or
facilitating fast payout to depositors. The establishment of the
special resolution regime was widely supported by stakeholders
throughout the consultation process; I am also grateful for the support
from Opposition
Members. As
I have said, clause 1 clearly sets out the framework for the whole
package of SRR tools—we will debate the tools
later—giving the authorities the full range of options for
dealing with a bank that is experiencing difficulties. I appreciate
that the Committee will wish to discuss many of the provisions that the
clause summarises, and which I have just briefly run through. I am
looking forward to debating the provisions in detail over the remaining
sittings. However, I propose that detailed consideration of those
provisions be reserved until we reach the corresponding clauses. I will
be guided on that by you, Mr. Gale. Given that clause 1 is a
broad summary clause, intended to provide users of the Bill with a
clear understanding of its contents, I urge that the clause stand part
of the
Bill.
The
Chairman: The clause is fairly wide-ranging—as the
Minister has indicated—and it is up to the Committee to decide
how broad it wishes the clause stand part debate to be, bearing in mind
that we need to try to avoid covering too much ground that will be
touched on under other clauses. If it becomes necessary to embrace
other arguments and discussions prior to further clauses being reached,
I shall bear that in mind. As the issue is complex, I am acutely
conscious of the need to have a fairly wide-ranging debate now. The
decision is in the hands of the Committee.
Mr.
Hoban: It is a pleasure to serve under your chairmanship,
Mr. Gale, for this ninth sitting, which by my reckoning
takes us to about halfway through the Committee’s proceedings. I
am not sure that we have broken the back of it yet, but the end is in
sight. I take note of your comments, Mr. Gale, about guiding
our debate. I recognise the challenge in trying to restrict remarks.
One could make a speech that lasted for both sittings today and well
into Thursday, but it would not be in my interests or those of the
Committee to go down that
route—
Mr.
Hoban:—although my hon. Friend might tempt me to do
so if he is not careful. I want to give a sense of where we are coming
from over part 1 and to set the backdrop for our debate on
it. As the Minister
said, clause 1 sets the scene for part 1. I share his recognition that
one of the learning points from the crisis over the last year is the
lack of a decent toolkit for dealing with the problems of a failing
bank. That came out particularly clearly from the debate on the future
of Northern Rock and the time it took to resolve that situation
suggests that we did not have the right tools available. I suspect that
if the tools that were initially developed in the Banking
(Special Provisions) Act 2008 and have been fleshed out in this Bill,
had been deployed in respect of Northern Rock they would
have produced a different outcome. We do not know what that outcome
might have been, but we have seen how Bradford & Bingley was
tackled and in some respects it was not dissimilar to Northern Rock in
its problems. A very different solution was found for Bradford &
Bingley compared with Northern
Rock. It is in a way
disappointing that the Government have not listened to the warnings
that they were given prior to this crisis about the adequacy of the
framework for dealing with a failing bank. At the end of one of the
scenario-planning exercises that the tripartite authorities undertook
and which looked at this issue in about 2005, both the Governor and the
then chairman of the FSA, Sir Callum McCarthy, highlighted the need for
a review of the tools that were available. They recognised
that the framework that was in place was not sufficient to deal with
the consequences of a failing
bank. The
Bill provides a set of tools, the stabilisation options in part 1, the
insolvency procedure in part 2 and the administration procedure in part
3. When considering those stabilisation options and the transfer to a
private sector purchaser and to a bridge bank and temporary public
ownership, we need to bear it in mind that this part of the Bill
invests significant powers in the tripartite authorities. Those powers
enable them to make important decisions affecting the function of the
banking system and the wider financial sector, as well as affecting the
outcomes for individual institutions and their creditors. The framework
for the exercise of these powers is set in clauses 4 and 5, and we will
talk about them in more detail later on.
Clause 4 sets
out the objectives of the special resolution regime. The Committee will
note from the range of amendments tabled on clause 4 that there is a
question
about the completeness and adequacy of the framework which we would want
to probe in that debate. Clause 5 talks about the code of practice. We
are grateful for the early sight of the code last Thursday, but as the
Minister wrote in his covering letter, it is very much a work in
progress. It makes it a little difficult in the context of the debate
on clause 5 to understand just what the safeguards will be over the
exercise of the power by the Bank, the FSA and the Treasury, given the
amount of work that still needs to go into the code. It would be
helpful for the Committee if, in his summing up of this stand part
debate, the Minister would outline how he envisages the process of
consultation on development of the code working, in parallel with the
passage of the Bill.
For my part,
I would want to see before Report in this place a more detailed code
that is much closer to completion—I accept it might not be
finalised—than the one that was circulated to us on Thursday, so
that we can be sure that a robust framework is in place that will
govern the use of these powers. I am sure that when we reach clause 5
we will have a long discussion about the nature of the
code.
10.45
am The
concern I have—also expressed in the response to the
stakeholders’ consultation—is to ensure that there is a
proper framework in place so that these powers are exercised in a
predictable way: that people know the circumstances in which they will
be exercised. That is what we are lacking at the moment. We will try to
tease out how we shall know the circumstances in which the powers will
be exercised. That requires further elaboration in the code and I hope
that today’s debate helps us establish more detail.
In talking
through this part of the Bill, it might help the Committee if the
Minister were able to use recent examples of how the powers in the
special provisions Act have been used, to illustrate how they will be
exercised in the framework in this Bill and to explain the points of
difference between the special provisions Act and the Bill before us.
The Minister referred to how Bradford & Bingley was dealt with in
the context of temporary public ownership and the transfer of shares
and property. We also had the situation with Heritable where the FSA
determined that the threshold conditions had been breached and that led
to deposits being transferred to ING Direct and the rest of Heritable
being placed into administration; there was a similar pattern with
Kaupthing. These are powers that we would expect to see in this
Bill.
However, one
element of the Icelandic banking system fell outside the powers of the
special provisions Act and it would be helpful for the Committee to
understand how the Bill would deal with Landsbanki’s branch in
the UK. A different set of powers was used to tackle the problems faced
by Landsbanki. We need to understand how the Bill would tackle a
situation where a bank’s branch based in the UK faced
significant financial problems. A relatively large number of banks
based in the UK operate through a branch system rather than through a
UK subsidiary. We will come to that in clause 2, when I will
probe it in more detail. That important issue needs to be
resolved.
We want to
ensure there is some predictability in the way that these powers are
used. That will require us to probe some of the language in later
clauses. Clause 7(3), for example, says that the power can be exercised
if “it
is not reasonably likely that...action will be taken...to
satisfy the threshold
conditions.” That
sounds a relatively low test and I think people would expect a higher
test where the threshold conditions are to be invoked. We will come to
that. That is why it is important in this debate on part 1 to tease out
some of the language and the meaning, certainly in relation to that
clause. The explanatory notes state:
“Those
conditions essentially demarcate the boundary that must be crossed
before the stabilisation powers...may be applied to a
bank.” That
does not further our understanding of how clause 7 will
work.
The issue of
partial transfers is one of the most contentious in the clause, and
stakeholders have expressed concern about it. Before debating the
relevant clauses, we will want to see as much as we can of the draft
statutory instruments that relate to partial transfers, or a clear
statement from the Government of the principles that might underpin
them. Part of the architecture of the reforms is that the power should
be set out in primary legislation, the safeguards in the secondary
legislation and further elaboration in the code of practice. We need to
see that entire package before we decide whether we are content with
the Bill. The Minister has expressed his willingness to make it
available, for which I am grateful, but the state that the code of
practice was in when it was circulated on Thursday suggests that there
is still some way to go before those documents approach a reasonably
final
stage. My
final point is that the Bill focuses on what will happen when things go
wrong. It is important to have the right set of solutions in place when
that happens, but I am sure that all members of the Committee feel that
prevention is better than cure. We want to ensure that the FSA, the
Bank and the Treasury, in tandem with the work that we are doing here
to the legislative framework, look carefully at how they will ensure
that the preventive framework is in place, so that those powers will
hopefully remain sitting on a shelf gathering dust after the current
crisis is over, rather than being used on a regular
basis. Sir
Peter Viggers (Gosport) (Con): This is a crucial clause in
an important Bill. We must realise that we are not going back to the
year 2006. When the legislation is passed, we will not be returning to
the happy, confident days before the credit crunch impacted a year or
more ago. To that extent, the Minister is completely right when he says
that the measures we are putting in hand are permanent and that many of
the issues relate to a new permanent framework, and that is why it is
so important to get it right.
When the US
authorities were faced with difficulties and introduced Sarbanes-Oxley,
the effect on the banking industry and the efficiency of financial
markets was disastrous. The City of London will be allowed to expand to
a greater extent than it might otherwise have done because the American
financial markets are now rather constipated and hampered by the
bureaucratic and legalistic effects of Sarbanes-Oxley and the
imposition of measures that caused difficulty for their
operation.
Some of the
measures that we are introducing now will be permanent, but others will
of course be temporary, and that imposition will need to be removed if
we are to return to the days of an efficient and confident banking
system. We need to distinguish carefully between the permanent
measures, which we must get right, and the temporary measures needed to
satisfy the present difficulties.
I have
previously—I remember raising the issue with the
Minster—put forward the nearest analogue to the present
situation, which is the situation of Lloyd’s of London in the
1990s. I draw on my experience as a director of a bank in the secondary
banking crisis of the 1970s, so I have, uniquely in the Committee, been
here before. I was also one of the four members of Lloyd’s of
London’s audit committee when it pushed through what was then
the biggest single corporate rescue in the history of finance, so I am
sure that the nearest analogue to our present situation is
Lloyd’s of London. In that case, an insurance underwriter would
underwrite a risk and then lay it off by reinsuring with another
insurance entity. That second insurance entity would then lay off his
risk. What would develop was what was known in Lloyd’s days as a
spiral, which was a spiral of reinsurance so that the second, third,
fourth, fifth—perhaps the 15th—insurer did not know the
exact nature of the assets he was reinsuring. That is a very close
parallel to the current collateralised debt obligations. Our present
difficulties arose because of the creation of collateralised debt
obligations in the United States initially, and the reinsurance and
refinancing of the toxic assets in a spiral very similar to the
Lloyd’s spiral of the
1990s. Mr.
Brooks Newmark (Braintree) (Con): I have to agree with
everything that my hon. Friend is saying about some of the causes. Does
he agree that another major cause was that many of the directors of
these banks did not understand where some of the hot shots on the
derivative desks were making the money? The derivatives they were
trading were very complex and highly leveraged. The question here is
how we legislate to ensure that directors understand where their
institutions are making their money and what the risks associated with
those assets
are.
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