Ian
Pearson: The hon. Gentleman makes a fair point and it is
something that we will want to consider. Investment banks are
represented on the liaison group. They agree that the SRR
should focus on deposit-takers, but there is clearly an
issue for the future, which we are considering.
The
second point raised by the hon. Member for Fareham concerns our
limitations with regard to branches. As I outlined in the earlier
debate, we need to be clear that the SRR can apply only to
UK-incorporated banks. Under European economic area law, prudential
regulation of EEA branches is for the home state regulator who is
responsible for taking the lead on resolving difficulties with EEA
banks. The powers of the host state regulator are therefore limited.
Even if we sought to take powers to apply the SRR to EEA branches, the
UK authorities could act on those powers only in highly circumscribed
ways. Many of the SRR powers—for example, share-transfer powers,
which have been developed for use in relation to shares and securities
as defined in UK law—would have to be completely redesigned to
be applicable to EEA branches.
The approach
that we have taken is consistent with the principles of home state
regulation of EEA branches. However, the Committee should also note
that the remit of the Financial Services Compensation Scheme extends to
branches of banks from other EEA states, which have joined the top-up
arrangements, as per the directive. Of course, the FSA works closely
with other regulators within the EEA to resolve difficulties with EEA
firms operating in the UK.
Our
experience with the Icelandic branches has demonstrated the importance
of ensuring that home state regulation is effective. We need to hold
further discussions about that in international forums. A college of
regulators has also been proposed, but we need to ensure that people
putting money into a branch of a foreign bank feel sufficiently assured
that their money is safe, and to ensure that it is made clear which
authority is regulating a bank or building society when people are
investing their money.
Mr.
Hoban: The Minister has touched upon the distinction
between branches regulated through home/host arrangements and
UK-incorporated subsidiaries. More than anyone appreciated, the
Landsbanki situation revealed the growing gap for consumers between
branches and UK-incorporated businesses. Some measures in the Bill
would enable a wholesale transfer, for example, of accounts from one
bank to another, as happened with Bradford & Bingley. I am not
clear from the Bill and from the Minister’s explanation whether
that type of facility would have been available to the depositors of
Landsbanki as a branch. I suspect that it would not have been, so
depositors will have to understand that there are two levels of
protection and that it will be much easier for them to get continuity
of service and to have instant access to their money if a UK bank is in
trouble, because the safeguards do not exist with foreign-owned
branches. Icesave depositors could be waiting until the end of the
month to get their money. How do the Government or the FSA intend to
communicate the important differences between a UK-incorporated bank
and a branch of a foreign
bank?
Ian
Pearson: An important issue of investor awareness and
information is being raised, which we have all suddenly become far more
aware of over the past few months. It has always been the case that a
person investing in the Isle of Man is investing in a separate tax
jurisdiction with a separate regulatory regime. I do not think that the
situation has been made as clear as possible to individual investors,
whether they are investing in a branch of an Icelandic bank or in a UK
subsidiary of an Icelandic bank. There needs to be greater
clarification in the marketplace, which, I am sure, the Financial
Services Authority, which regulates those matters, is
addressing.
Mr.
Bone: I am grateful to the Minister for accepting an
intervention just before he finishes. From what he is saying, I
understand that there will be a compulsion or a health warning on
foreign subsidiaries in this country—it is a very good
idea—which says, “Certain aspects of your investment are
not protected by British regulations”. Is that what the
Government are
proposing?
Ian
Pearson: I certainly want to use that sort of language.
Investors should be aware of the regulatory regime and the deposit
protection measures that apply to any bank in which they consider
putting their money. I hope we all accept that general principle. We
need to ensure that there is clarity of information in the marketplace,
which is perhaps not there to a sufficient extent at the
moment.
Several
hon. Members
rose—
The
Chairman: Order. The Minister has wound up the
debate. Question
put and agreed
to. Clause
2, as amended, ordered to stand part of the
Bill.
Clause
3Interpretation:
Other
expressions
Ian
Pearson: I beg to move amendment No. 88, in clause
3, page 3, line 1, leave out from
‘assistance”’ to end of line 2 and
insert ‘has the meaning
given by section [“Financial
assistance”].’.
The
Chairman: With this it will be convenient to discuss
Government new clause 9— “Financial
assistance”.
Ian
Pearson: The purpose of the amendments is to provide the
Government with the power to specify assistance that should or should
not be included in the definition of financial assistance for the
various purposes for which it is defined in the Bill, particularly as
it is used in part 1. The term “financial assistance”
appears throughout part 1. For example, it appears in relation to the
trigger conditions for the special resolution regime and in relation to
the valuation principles for the calculation of compensation.
Committee
members will recall that the term also appears in part 7, as we have
already discussed, to provide the necessary parliamentary authority for
the Treasury to use public funds to provide financial assistance to
financial institutions and
“in connection
with, the provision of financial assistance to building
societies.”
In all circumstances,
the term includes giving guarantees, indemnities or any other kind of
financial assistance, actual or contingent. The reason for moving the
amendment is to recognise the fact that the Government can provide
financial assistance to failing banks in a number of ways, and they may
not wish some form of assistance to be treated as financial assistance
for the purposes of all of the Banking Bill’s
provisions. Financial
assistance is mentioned throughout this part of the Bill, but perhaps I
might explain the purpose of the amendment by referring to two
examples. First, in Clause 9(3), the provision of financial assistance
for the purpose of resolving a threat to financial stability is defined
as one of the conditions for taking a bank into temporary public sector
ownership. However, it is not the Government’s intention that
all forms of financial assistance to banks should mean that such a
condition would be met, as that would provide a serious disincentive
for banks to take advantage of other forms of financial assistance. In
particular, the Government are thinking of the recent financial
assistance that has been offered to the banking market as a whole,
including the recapitalisation scheme and the credit guarantee scheme
for banks to take up on commercial
terms. Another
example can be found in clause 7, which requires the FSA to determine
whether a failing bank remains in compliance with its threshold
conditions. When assessing whether the threshold conditions continue to
be met, it is likely that it will be appropriate for the FSA to
consider the position of the firm without taking into account financial
assistance provided to that firm on an exceptional basis. However, it
may be appropriate for the FSA to take into account any financial
assistance provided under a system-wide scheme—such as
that
provided under the recapitalisation scheme—when considering
whether the firm still meets its threshold conditions. It is difficult
to say now what forms of assistance will be excluded from the
definition. To future-proof the Bill by providing for current and
future schemes of financial assistance to be included or excluded as
appropriate, the Government believe that it is prudent, therefore, to
take a power to specify types of assistance that should and should not
be counted as financial assistance. I hope that hon. Members will agree
that the amendment is a sensible and prudent measure and I commend it
to the
Committee. 12.15
pm
Mr.
Hoban: I am grateful to the Minister for clarifying the
purpose of the amendment and new clause 9. Nevertheless, I want to
question him further. I think that he was trying to draw a distinction
between specific assistance to an institution and system-wide support.
He cited the recapitalisation package, but that has been accepted by
only a handful of banks, so the credit guarantee scheme is available
only to those banks that signed up for it.
I shall
broaden the matter out a little. Last week, the Bank of England
published a consultation document on the types of financial assistance
that it might provide to banks. On the whole, they are system-wide
schemes. They include the operational facilities that it proposes using
to replace the standing facilities; the statutory discount window
facility that will enable banks to borrow, given security against a
wide range of collateral at any time, the type of collateral reflecting
the size of the drawing; and the possibility of permanent long-term
repos against high-quality private sector securities. As far as I am
aware, they are system-wide schemes. Do the Government believe that
they would fall outside the definition of financial assistance and that
they have no mind to accept new clause
9?
Ian
Pearson: On the recapitalisation scheme, the Government
believe that assistance under it should not be of a type that would
trigger certain provisions of the Bill—for instance, the
provision for taking a bank into temporary public sector ownership. Nor
should system-wide financial assistance, including the recapitalisation
scheme, be treated as financial assistance for the purposes of the
FSA’s assessment of whether the threshold conditions have been
met.
The purpose
of the recapitalisation scheme is to recapitalise banks and place them
on a more secure financial footing. It would therefore be inappropriate
if access to the scheme impacted on triggers for the use of the SRR
powers. However, that does not mean that it will be excluded from the
definition of financial assistance for all the purposes of the Bill.
For instance, in some cases, access to the recapitalisation scheme may
be relevant in determining compensation.
The special
liquidity scheme has been mentioned. It does not fall within the
definition of financial assistance, but it is not clear whether such
system-wide assistance should be treated as financial assistance for
the purposes of the trigger mechanisms in the Bill, including the
determination by the FSA of whether a bank meets its threshold
conditions.
Mr.
Hoban: The Minister said that it is not at all clear
whether things such as the special liquidity scheme should be treated
as financial assistance. He will understand that those who are using a
special liquidity scheme would like some clarity on whether it is
classified as financial assistance under the
Bill.
Ian
Pearson: Let me try to clarify the matter. The special
liquidity scheme falls within the definition of financial assistance,
but I said that it is not clear that such system-wide assistance should
be treated as financial assistance for the purposes of the trigger
mechanisms in the Bill, including the determination by the FSA of
whether a bank meets its threshold conditions. We therefore need to
exclude such assistance from certain provisions of the Bill. I hope
that I have made matters clear.
Mr.
Hoban: I am not entirely sure that the Minister has done
so. It would be useful for the Committee to know in which sections it
might be deemed to be financial assistance and in which it will not. My
understanding is that the special liquidity scheme was designed to help
banks through the current liquidity crisis. The Bank of England has
made some proposals, but it would be helpful to know how it might
develop its money market operations to improve liquidity in the market.
What will be the precise interaction between those schemes and the
Bill? That might well affect the extent to which banks take up the
schemes. It also suggests that a bank that takes up a special liquidity
scheme might find itself at risk under the Bill if the scheme is not
excluded from the definition of financial assistance
throughout.
Ian
Pearson: I hope not to create confusion on that point. I
hope that I was clear in saying that the SLS does fall within the
definition of financial assistance, but that its operation would
clearly not be something that one would want to take account of when
the FSA was determining the threshold conditions. We will need to
exclude that from certain provisions of the Bill, but not all of them.
It might help members of the Committee if I wrote to them to explain in
more detail how we see amendment No.88 and new clause 9 operating in
practice.
Mr.
Hoban: I am grateful for the Minister’s proposal to
write to us, and it would be helpful if he indicated in that letter the
sections in which the SLS would and would not be treated as financial
assistance.
Ian
Pearson: I will of course try to bring as much clarity as
I can in that area, and I accept the point that some people will need
to understand exactly how the regime will
work. Amendment
agreed
to. Clause
3, as amended, ordered to stand part of the
Bill.
Clause 4Special
resolution
objectives
Mr.
Hoban: I beg to move amendment No. 77, in
clause 4, page 3, line 19, at
end insert ‘; and for
the avoidance of doubt, this includes
ensuring— (i) continuity of
service; and (ii) unrestricted
access to deposits.’.
The
Chairman: With this it will be convenient to discuss the
following: Amendment No. 74, in
clause 4, page 3, line 19, at
end insert— ‘(6A) Objective
3A is to protect and safeguard the value of the
enterprise.’. Amendment
No. 78, in
clause 4, page 3, line 20, at
end insert ‘and to
ensure that the expenditure of any public or private funds is done in
an economically efficient
manner.’. Amendment
No. 76, in
clause 4, page 3, line 22, at
end insert— ‘(8A) Objective
6 is to protect the interest of
creditors. (8B) Objective 7 is
to avoid distorting competition amongst
banks.’. Amendment
No. 79, in
clause 4, page 3, line 24, at
end add— ‘(10) In respect of
Objective 7, competition law shall apply to a bank, whether it is
wholly or partly owned or controlled by the Government, including a
bank to which sections 9 and 12
apply. (11) Where a bank is
wholly or partly owned or controlled by the Government and where
section 214 applies, the bank is prohibited from using its favourable
position or Government support to its commercial advantage and thereby
to prevent, restrict or distort competition in the market for financial
services as a whole, or on a product by product
basis. (12) For the purposes of
subsection (10) competition law includes the provisions of the
Competition Act 1998 and the Enterprise Act 2002, and European
Community law competition
provisions. (13) For the
purposes of subsections (10) and (11) ownership or control shall be
determined by reference to sections 26 and 29 of the Enterprise Act
2002 and by reference, where Community law applies, to the Council
Regulation 130/2004 (the European Merger
Regulations).’. Clause
stand
part.
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