Mr.
Hoban: The clause is an important element of the Bill
because it sets out the objectives that will determine how the various
stabilisation powers will be exercised. I thought that I would perhaps
start with the clause stand part section of the debate and then move on
to the various amendments, because that is probably the most helpful
way of putting the amendments in
context. The
clause lists the five objectives to be met through the special
resolution regime. Subsection (9) makes it clear that those are set out
in no particular order, but I think that since our debate about the
types of institution to be covered by part 1, we have all had a feeling
that one of the main thrusts is the protection of depositors, and in a
moment I will deal with how I see that playing out. I will just comment
on the objectives.
We considered
the first objective, financial stability, at some length last Thursday,
so I do not want to run through that debate again, and I suspect that
you would not allow me to do so, Mr. Gale. I was taken by
the definition given in the draft code of practice, because it gives an
indication of the direction in which the Government are travelling. It
is rather a pity that the Committee was not able to see the code of
practice before our debate on Thursday, because I thought that one
point in the definition went rather wider than that given by the
Governor of the Bank of England and by Nigel Jenkinson, the executive
director of financial stability at the Bank, in oral
evidence.
In the code of
practice, it is suggested that financial stability includes
“the efficient
operation of financial services and markets for...capital-raising,
risk transfer, and the facilitation of domestic and international
commerce”.
That is quite a broad
and helpful definition and I think that it is actually broader than the
definition that was given when we discussed it last Thursday. However,
I am not clear—this is one of the recurrent themes that has
emerged throughout the debate about the objectives—what weight
will be given to the individual objectives when looking at the
operation of the special resolution regime.
One of the
consequences of the way in which the Government used powers to freeze
Landsbanki’s assets was that it affected the efficient operation
of wholesale markets. It created uncertainty about how transactions
would be closed out, and the Government responded to that uncertainty
through their use of clarifications to licences under a separate
clarificatory document. But the action created uncertainty in the
market, prevented the efficient operation of the wholesale market, and
acted as a barrier to international commerce. In seeking to protect
depositors and, potentially, safeguard taxpayers’ interests, the
Government undermined the efficient working of capital markets.
Therefore, it would appear that in the context of the
Government’s approach to Landsbanki—given the
Minister’s remarks on clause 2, I appreciate that branches are
excluded from the powers in this Bill; I am just using this as an
example—objective 3, “to protect depositors”, and
objective 4, “to protect public funds”, had higher
priority than financial stability, or certainly that bit of the
financial stability objective that relates to the efficient functioning
of capital
markets. Although
the clause states in subsection (9) that there is no priority, it would
be helpful if the Minister could give us some feeling of the kind of
circumstances that might arise and how the objectives fit into them. We
do not know that at the
moment. The
clause states that objective 2
is “to
protect and enhance public confidence in the stability of the banking
systems of the United
Kingdom.” Public
confidence has several dimensions, according to the code. It refers to
the expectation that deposits will be repaid in accordance with the
terms, that normal banking services will be continuously available,
that perceived problems in one bank or building society will not extend
to other banks, and that systems exist to protect the interests of
depositors if a bank does suddenly
fail. The
intention of the objective is to drive us towards the view that
authorities will have regard for the need to act in a way that enhances
rather than detracts from people’s confidence in the banking
system, but I wonder to what extent the objective will be looked at in
the context of the crisis. We have had a sustained period of financial
instability, and there is a perceived systemic risk to the banking
system. As a consequence, to use the Minister’s phrase in giving
evidence to the Committee a fortnight ago, the Government will do what
it takes to fix it. Clearly, what it takes in the context of a systemic
crisis may well be very different from what it takes to fix the
problems of a single bank that faces problems in isolation from the
others.
For example,
in the context of this crisis, we have a de facto 100 per cent.
guarantee for retail deposits, as evidenced initially in respect of
Northern Rock but now in connection with deposits with Icelandic banks
that have not been transferred to ING Direct, but we know from our
debate on the Financial Services Compensation Scheme and the amendments
to the FSA’s rules that the deposit limit is
£50,000. My
understanding is that if we were to look at the various powers that are
available to the Government, in normal circumstances, less weight may
be given to objective 2 than in the current circumstances, and in
normal circumstances we would go back to a £50,000 limit rather
than a 100 per cent. limit. It would be helpful if the Minister could
explain how objective 2 would work in periods of financial instability
such as we have now, and how important it would be if we were in more
stable
times. Objective
3, which is intended to protect depositors, was largely covered in our
debate on the Financial Services Compensation Scheme at the start of
Committee about what role the FSCS can play in ensuring that there is a
speedy pay-out to depositors. If consumers can access their funds
quickly and speedily, that will give them confidence in the strength of
the banking
system. Another
way of protecting depositors is to transfer accounts to another bank.
That could take place under the stabilisation options as part of the
powers that are available. That is what happened with Bradford &
Bingley. Over the weekend, the accounts were transferred from Bradford
& Bingley to Abbey Santander and, as a consequence, the depositors
at Bradford & Bingley had access to their money from Monday
morning. They would not have noticed a difference in the system,
because it was a seamless transfer, their accounts were not frozen and
there were no problems about paying their bills, whereas those accounts
that were not covered by that type of process—those of Kaupthing
Singer & Friedlander that were not part of the Edge
brand—are being guaranteed by the Government and will be subject
to a pay-out through the Financial Services Compensation Scheme. People
with such accounts will not have that same easy access to their money.
From the debate last week about Landsbanki, we have seen that people
with deposits in Icesave will not get access to their money probably
until the end of this month. There is an issue about ensuring that the
tools that we have facilitate easy access to depositors’
accounts. That is an important
objective. The
Minister may want to correct this impression if he thinks it is
erroneous, but it is clear from the debate so far that, if we were to
consider ordering the objectives, objective 3, on the protection of
depositors, would top the list. I would be interested to find out
whether the Minister disagrees with that interpretation and under which
circumstances it would not be the most important
objective.
Ian
Pearson: The hon. Gentleman clearly understands the
clause, including subsection (9), which
states: “The
order in which the objectives are listed in this section is not
significant; they are to be balanced as appropriate in each
case.”
Yet he is trying to get
the Government to indicate that certain areas are priorities; they are
all priorities for us. We will want to make decisions depending on the
circumstances of particular cases. We believe that we are discussing
the right sorts of areas. I resist his view that one objective is more
important than another; they need to be
balanced.
Mr.
Hoban: I accept that up to a point. However, this part of
the Bill is limited to institutions that accept deposits, as we
established clearly when we discussed clause 2. I have to say that the
Bill points in a particular
direction. The
Government’s priorities in dealing with the current financial
crisis and with where particular institutions have been under threat
have pushed towards objective 3 taking the lead in respect of how the
crisis is to be resolved. Perhaps that is a presentational issue and if
that is so I would accept that. However, there is a tension between the
objectives and we need to understand how that tension would work out in
practice. If the objectives rank equally, it would be helpful to
understand where the trade-offs between them are, because at the moment
I am not clear that there is necessarily a trade-off between objective
3 and the other
objectives.
Mr.
Bone: My hon. Friend is making an important point.
Clearly, some of the objectives cannot be met at the same time. Is not
the reality of the matter that when panic set in at No. 11 Downing
street, when the crisis was in full flow, the Government’s
objective was presentation? Whatever made the Government look best was
the objective. That is not really the basis for good government. We
need to know the different weighting of the
objectives.
Mr.
Hoban: My hon. Friend takes an uncharacteristically
uncharitable view of the Government’s objectives on the matter.
However, he makes a point. The thrust of the debate has been protecting
depositors, and there are going to be tensions between the
objectives. Notwithstanding subsection (9), I tempt the Minister to
outline a scenario in which objective 3 would be subordinated to
another objective, and to say where the trade-off is between it and
other objectives. There could be a trade-off between objectives 3 and
4, because the Government could issue a 100 per cent. guarantee of
deposits. That would protect depositors, but at a cost to the taxpayer.
As we discussed in earlier debates, the taxpayer is likely to pick up
the cost of guarantees on amounts of more than £50,000 in
connection with some of the Icelandic banks. There is a tension between
protecting taxpayers’ interests and protecting depositors. I am
not being critical of the Government, but in those sorts of cases
objective 3 comes before objective 4, not only in the sequence in the
Bill but in producing an
outcome. It
might be that that trade-off is not quite as clear in more stable
times. The Government may decide that there is not a systemic risk to
the financial system and therefore, for example, that they can give a
lower priority to the protection of depositors through the Financial
Services Compensation Scheme than they give at the moment. However,
given the debate on this clause, a degree of transparency regarding the
importance of the various objectives and how they will work in practice
needs to emerge. This is one of the key clauses in the Bill, and such
transparency will help people to understand how the special resolution
regime will work in
practice. While
we are on objective 3, I should like to speak to amendment No. 77,
which would add, at the end of line 19, the
words “and
for the avoidance of doubt, this includes ensuring...continuity of
service; and...unrestricted access to
deposits”. As
my remarks have indicated, depositors’ preference would be the
ability to be transferred seamlessly from bank A to bank B when there
is a financial crisis, rather than having to make a claim through the
FSCS. The amendment would emphasise that that is the best way to
achieve the right outcome for depositors. It is not the only way,
because we have the FSCS, but for the protection of depositors, it is
important to be clear about our expectations when the tripartite
authorities look at the various instruments to be
exercised. The
great example of when such an approach worked was Bradford &
Bingley. The approach was facilitated in a way that kept the payment
system open so that people could process their transactions,
ordinarily. There is a concern about the way in which one of the
Icelandic banks was dealt with. The payment system in respect of that
bank and its customers was frozen, thereby preventing people from
making payments from their accounts. For a number of reasons, that is
not a good position to be in—neither for the customers nor the
bank. If customers cannot make a mortgage payment to a lender because
their account is frozen, they will be in arrears. That is not good for
the customer and creates a problem for them with their bank. If a bank
suffering from that payment freeze is a mortgage bank, it will not be
able to receive payments from its borrowers, which will create
uncertainty about the value of the book of business. If there is a
problem with consumers, the transfer and the way in which they access
their bank accounts, the best thing to do is to ensure that there is a
transfer from one bank to another, rather than face the consequences of
their account being frozen and then be locked out of that account until
the FSCS has managed to work its way through. That is why, through
amendment No.77, we are trying to be more precise about what we would
like to see: an optimal solution for how to protect
depositors.
In the
context of objective 4, which is “to protect public
funds”, there is little explanation in either the code or the
explanatory notes of how that objective will work in practice and in
conjunction with the other objectives. We know, for example, that
taxpayer funds are at risk at Northern Rock, but they are also
potentially at risk at Bradford & Bingley. In addition, there is
exposure on Landsbanki and the non-edge accounts of Kaupthing, where
there is a taxpayer guarantee. We know that taxpayer funds have been
used as part of a recapitalisation package for the banking sector, and
last Thursday, in the context of clauses 214 and 215, we discussed how
we can broaden the categories of the financial institutions that could
receive financial support through the consolidated loans fund. Today,
we have talked about broadening the definition of financial
assistance. In
the context of objective 4, we need to understand from the Minister
what value is attached to the use of taxpayers’ funds, and
whether the Government will instinctively back a solution that has more
limited
recourse to public funds than one that would require greater recourse to
public funds. Are there options under the various tools available under
part 4 that require a small amount of the taxpayers’ fund to
work, and which would therefore be the Government’s preference,
even if they might compromise the stability of the financial
system’s objective in objective 1? Again, we want to be able to
understand the interplay between the
two. We
will come back to objective 5 when we talk about later clauses. One of
the key words in the code that we ought to dwell on for a moment is
“proportionately”. The code says that
“the bank or
building society itself, its shareholders or creditors or other third
parties...have a right of control
over” their
property. One
of the Bill’s features is that in certain circumstances, it
gives the tripartite authorities the right to interfere with control
over that property. The argument in the code is that
“The inclusion
of this objective acknowledges the importance of acting proportionately
in exercising these
powers.” I
am not clear from the code what “proportionately” means
and under what circumstances the Government think it appropriate to
break those rights of control. The partial transfer mechanism does
break that right of control, and some safeguards will be put in place
over the exercise of that right. It would be helpful if the Minister
threw some light on paragraph 13 of the code. As drafted, it does not
go far enough in setting out the way in which this objective could be
satisfied. 12.45
pm I
want to move to amendments Nos. 74, 76 and 78. We now have an
opportunity to discuss whether the list of objectives in clause 4 is
complete and whether there are other objectives that we should bear in
mind when exercising these powers where there are the stabilisation
tools, and what sort of framework should be used to govern the choice
of tools by the tripartite authorities. I do not want to steal the
thunder of the hon. Member for South-East Cornwall by picking up on
amendment No. 74, but, as he said from a sedentary position, it
complements amendment No. 76, which inserts a new objective 6 to
protect the interests of creditors.
This brings a
different dimension to the debate about the objectives. We talked about
them in the context of protecting depositors and the taxpayer. We
touched a little on the context of objective 5, but other people have
an interest in how the stabilisation tools are going to be used. There
are creditors who will have an interest, not just trade creditors, but
non-retail depositors. These are people who have money on deposit with
a particular bank who are not covered by the FSCS and whose accounts
will not be transferred across automatically in the way that
we had envisaged in the context of objective
3. It
is worth just mentioning that objective 3 just talks about depositors.
It is no more specific than that. It does not say retail. The Minister
might argue that objective 3 covers wholesale as well as retail
depositors. This is where some tension arises in the clause. One can
envisage a situation where it is possible to achieve objectives 3 and 4
in the context of a particular crisis by transferring depositors across
to a third party and then
setting off a mortgage book to a separate third party through a fire
sale. That fire sale may raise enough to cover the taxpayers’
exposure, and obviously the transfer deposits would meet the interests
of the depositors, but would it be sufficient to cover the interests of
other creditors? There is insufficient recognition in the clause of the
interests of other creditors. Inserting objective 6 or objective 3A
into the Bill would provide a dimension that is currently
lacking. The
objective of the hon. Member for South-East Cornwall goes rather wider
than mine in terms of the enterprise value. It will take into account
the interests of shareholders. One of the things that we recognised in
the debate is that shareholders should bear some of the costs of the
failure of an institution. The question is whether having the more
precise definition that we should aim to protect the interests of the
creditors is a good way to ensure that the range of creditors in the
institutions are
protected. One
area that we need to think about is bondholders. There is some concern
that when we look at the people who provide capital, we often do so in
the context of shareholders and the equity element of the capital in a
business. Clearly, many institutions do raise money through bond
issues. That is where part of the concern comes regarding the adequacy
of the safeguards under the Bill as to whether bondholders’
interests are adequately protected. Explicit reference through either
proposed objective 3(a) or objective 6 would help ensure there is some
recognition of the role that bondholders play in financing businesses
and that their interests are not being disregarded in the pursuit of
any of the other objectives.
Amendment No.
78 will, at the end of line 20, insert the words:
“and to ensure
that the expenditure of any public or private funds is done in an
economically efficient manner.”
That is to make sure
that we look very carefully at the way taxpayers’ funds are
being used to resolve financial problems at a particular institution.
In examining the various tools that the Government are looking at, are
we making sure that the best way to get value for our money is
considered? If they are looking at financial support, perhaps through a
guarantee of deposits, is that the most effective way of meeting the
objectives of the Bill? Are there better, more effective ways they
could achieve
that? Amendment
No. 76 has two more objects. It protects the interests of creditors and
inserts a new objective 7, which is to avoid distorting competition
among banks. Amendment No. 79 amplifies the meaning of
objective 7.
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