Clause
2Interpretation:
“bank”
Ian
Pearson: I beg to move amendment No. 87, in
clause 2, page 2, line 28, at
end insert— ‘( ) Where a
stabilisation power is exercised in respect of a bank, it does not
cease to be a bank for the purposes of this Part if it later loses the
permission referred to in subsection
(1).’. This
is a technical amendment, which makes it clear that the provisions of
part 1 continue to apply to banks in respect of which stabilisation
powers have been exercised, even should such banks lose their
regulatory permission to accept deposits under the Financial Services
and Markets Act 2000.
An example of
where that scenario could be material is as follows: as we will discuss
when we come to clause 57, the expression “residual
bank” is used in subsection (1) of that clause to impose
continuity obligations between a residual bank and a transferee. It is
highly likely that a residual bank will have been placed in the new
bank administration procedure, and in such circumstances the residual
bank would no longer have a valid deposit-taking permission. The
amendment would prevent the argument from being made that a company
without a deposit-taking permission is not a bank, and hence not a
residual bank within the meaning of clause
57(1).
Dr.
Pugh: I should like move to a wider point. There used to
be a well honoured distinction between retail banking and investment
banking, but that has now completely gone in legislation. May I probe
the Minister
a little? Has any thought been given by the Treasury to reinstituting
such a distinction in terms of which regulations may apply to which
type of institution? Over time such distinctions become almost
meaningless, but that is part of the
problem.
The
Chairman: Order. Before we go wider, the Minister made it
plain, and it is clear, that this is a technical amendment. Ordinarily,
I would be relaxed about having a broader debate, but it might help the
Committee if we deal with the amendment and then have a stand part
debate during which hon. Members may go wider. I think that is the
appropriate way to
proceed.
Ian
Pearson: I am happy to abide by your instruction on the
matter, Mr. Gale. I have explained clearly that this is a
narrow technical amendment that we believe to be necessary, and I hope
that the Committee will support
it. Amendment
agreed
to. Question
proposed, That the clause, as amended, stand part of the
Bill. 11.45
am
Dr.
Pugh: I do not need to reiterate the remarks that I made
before, but there is a strong feeling that we might need different
regimes for different types of bank. If there is no capacity to
differentiate types of bank in legislation, it is obviously another
tool that is not in the toolbox. The legislation is clearly being
introduced in response to an immediate crisis, but there must be
far-thinking spirits in the Treasury who are considering what they can
do to give long-term stability to the banking sector as a
whole.
In America
and the UK, there is some thought that some of the liberalisation that
blurred distinctions between different types of bank was a mistake and
part of the problem. Is the feeling in the Treasury that a bank,
however it is defined, should simply have that sort of global meaning,
or is there capacity to distinguish between types of bank in regulation
and
legislation?
Mr.
Hoban: I do not normally get excited about the
definition bit of a Bill, but I just want to push the Minster’s
thinking on that point, partly to echo the comments of the hon. Member
for Southport, because he highlighted an important distinction.
Subsection 1 of the clause states
that “‘bank’
means a UK institution which has permission...to carry on the
regulated activity of accepting
deposits”. However,
some banks that do not accept deposits—investment banks, in
effect—would fall outside the scope of part 1. Elsewhere in the
Bill, we have already given the Government the power to provide
financial assistance to what would be called, in the context of the
amendment, non-banks and financial institutions that are not
deposit-taking institutions. That was set out in clauses 214 and 215,
which we debated last Thursday morning, so the Bill already envisages
that the Treasury could bail out an investment bank, insurance company
or investment manager. Investment banks make a major contribution not
only to the economy, but to financial stability, so
I
am not clear why they are being excluded. It suggests that the entire
bias of part 1 is to protect depositors, rather than looking at the
broader perspective of maintaining financial stability, which is set
out in the objectives under clause 4. I am a little concerned that the
wholesale operations of banks will not necessarily be covered in part
1. If one takes
into account what happened with the collapse of Lehman Brothers in the
US, one can certainly see that there has been a significant impact on
the UK as people sought to unwind their trades, and hedge funds tried
to work out their position. Hedge funds were examining whether their
agreements were permitted, whether the transactions between Lehmans and
its accounting partners would hold, whether client money counts, and a
whole host of related issues. I would not want to say that it
undermined financial stability, but it certainly slowed down the
current working of the wholesale markets. I would have thought that
some of the powers in part 1 might be of use if a wholesale bank were
to face financial problems, and I am concerned that
subsection 1 seems to exclude institutions that are commonly
known as banks but that do not accept deposits from
customers.
My second
point is about subsection (3). I touched on it in the previous debate
and the Minister flagged it up for more detailed discussion under
clause 2. Subsection (3) defines a UK institution as one
that “is
incorporated in, or formed under the law of any part of, the United
Kingdom.”
The example that I used
to probe the Minister on how far the regime goes the UK branch of the
Icelandic bank Landsbanki. Interestingly, Landsbanki also had a
subsidiary in the UK, which was dealt with differently from the branch.
People—myself included—would say that although it was
important for the Government to protect the interests of
Landsbanki’s depositors in the UK, it was evident that the
Government lacked the tools to look at the bank’s assets, which
is why they had to use the Anti-terrorism, Crime and Security Act 2001
passed in the aftermath of
9/11. How
will the powers in the Bill affect a branch in the UK? Branches
undertake significant banking activities, and the Financial Services
Compensation Scheme website will list all deposit-takers that are
branches of overseas banks. That will indicate how important the matter
is. In a slightly different area of financial services, rules have been
developed for businesses operating in the UK with headquarters
overseas, to enable the branch arrangement to become more familiar.
However, how Landsbanki was dealt with raises the broader question of
how we manage the affairs of branches where there is financial
collapse, which links to my point on investment banks. One investment
bank that springs to mind—a major player in London—is a
branch of its parent and is, therefore, not incorporated in the
UK.
Mr.
Gauke: My hon. Friend makes an important point. In
essence, the issue is that under the investment services directive,
prudential regulation for passported institutions is performed by the
home state regulator, not the host nation. At the moment, therefore,
the FSA and the Bank of England do not have a role in regulating
prudential supervision for such branches. It would be interesting to
know what, if anything, is changed by the
Bill.
Mr.
Hoban: My hon. Friend makes an important point. There is a
distinction between the conduct of business rules, which would cover a
branch operating in the UK, and prudential supervision. We could end up
with the curious situation of a financial services sector in the UK
that had become so internationalised that although the FSA regulated
the conduct of business, it could not say a great deal about prudential
regulation because there was a series of branches. If branches are
excluded from the Bill, the Government will have few tools with which
to protect the UK financial system when its stability is
threatened. It
is important that the Minister elaborates in his reply how the Bill
affects those branches, and what other tools are available to safeguard
the interests of depositors in branches. As the Landsbanki example
demonstrates, there seems to be a lack of alternatives, other than the
freezing order under the 2001 Act. I do not want to debate
that—we did so last Monday in a Committee on Delegated
Legislation—but it is a good example of the limitations of the
Bill and why the Government need to make clear which tools in the Bill
can and cannot be used in respect of a
branch.
Ian
Pearson: Clause 2 sets out the definition of a bank for
the purposes of the Bill. A bank is defined as a UK institution that
has a regulatory permission granted by the FSA under the Financial
Services and Markets Act 2000 to accept deposits. If such an
institution gets into serious difficulties, the authorities will have
the option of using the stabilisation powers of the special resolution
regime set out in part 1 where that is justified in the public
interest.
The
definition of a bank does not include a building society or a credit
union. They have their own particular legal characteristics and the
provisions of the special resolution regime need to be modified
accordingly. Clauses 71 to 75 set out how the special
resolution regime is applied to building societies and clause 76 allows
it to be extended to credit unions. The Treasury will also by order add
to the exclusions from that definition of a bank, which may be
necessary to refine further the precise scope of institutions that may
be subject to the SRR and to take account of future
developments.
Two key
points were raised by hon. Members. First, I shall respond to the hon.
Member for Southport’s point that the legislation does not
differentiate types of bank. That is not true. The Bill clearly applies
only to deposit-taking institutions. It does not apply to investment
banks without deposit-taking permissions, which are completely
different. I hope that makes the situation
clearer.
Dr.
Pugh: I accept that and I am grateful for the
clarification, but I think the Minister would accept that under
subsection (1) it is a necessary condition that a bank takes deposits.
A big bank may do lots of other things as well, so under the definition
of a bank one might find banks that are straightforward, traditional
banks such as the Co-operative Bank, and others where deposit-taking is
a very small, almost incidental, aspect of their business. Their real
money may be made elsewhere and they function in most respects as
investment
banks.
Ian
Pearson: I understand the point that the hon. Gentleman is
making but we consulted widely on the point about investment banks, and
it was clear that the
Bill and the SRR could not apply to non-deposit takers. The Treasury is
considering which steps to take in the case of other types of
institution and we will consult more widely. There is clearly a
significant
issue.
Mr.
Hoban: Can the Minister explain why it is not appropriate
to apply these powers to investment
banks?
Ian
Pearson: This is an area where we believe that further
work is needed. All the consultation that has taken place to date has
been on the basis of the Bill as it stands and to extend it would be a
significant change. Extending the SRR to investment banks may help to
protect financial stability if a failure were to occur but we believe
such action would have a significant number of downsides. The risks of
such an approach might include the fact that the tools might not be the
most appropriate for non-deposit-taking financial institutions. The
SRR, including the infrastructure, objectives, powers and some of the
tools, has been designed with an emphasis on depositor protection as
well as being part of financial stability. The cross-border nature of
the largest and most systemically important non-deposit-taking
institutions suggests that the national approach on its own might not
be enough. That applies to some extent to any deposit-taking
multinational but the issue is far more acute for investment
banks.
Mr.
Hoban: This almost falls into that great “Yes
Minister” thing of being too difficult. We are a global
financial centre and, yes, there is a range of multinational
institutions based in the UK, some of which are deposit-takers, some of
which are investment banks. One criticism of the previous arrangements
was that there appeared to be no measures in place to deal with the
collapse of Northern Rock. That had a detrimental impact on
London’s relative standing among global financial centres. We
are a global international centre, yet the Government have shied away
from thinking through the consequences of the impact of the collapse of
a multinational investment bank in the UK. The Government have missed
an important opportunity to think that through and to recognise
London’s pivotal role in international financial
services. 12
pm
Ian
Pearson: I give way to the hon. Member for
Braintree.
Mr.
Newmark: I thank the Minister for giving way. My hon.
Friend the Member for Fareham makes an important point. I am curious to
know what representations the Minister has had from the investment
banks, which are all based in the UK, and what feedback he has had
about what the Government
propose.
Ian
Pearson: There is widespread support for the measures in
the Bill, particularly the definition in the clause. The Bill focuses
on deposit-taking institutions.
It is quite right for the Committee to point out that investment banks
are in a different category. Most are not deposit-taking institutions
and to that extent would not be covered by the Bill. As I have
indicated there are potential downsides if we try to include investment
banks in the Bill. It is an issue on which the Treasury is doing
further work, together with the tripartite authorities. We want to
ensure that we take all the action that is necessary to give people
confidence that the overall financial system is in safe
hands. Mr.
Colin Breed (South-East Cornwall) (LD): We understand
that. The aim is to protect depositors. However, there are wider
issues, the widest or perhaps most appropriate of which is the fact
that most of the problems for depositors have been caused not by the
deposit-taking and normal banking business of those institutions, but
by the very activities of aspects of the bank that are not
included in these regulations. Therefore, there is a real case for
considering how the regulations can be moved into the
investment banking side and perhaps even for the real
disaggregation of those activities so that they can be separately
regulated.
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