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Session 2007 - 08
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General Committee Debates

Banking Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Jim Hood, Mr. Eric Illsley
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Eagle, Angela (Exchequer Secretary to the Treasury)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Keeble, Ms Sally (Northampton, North) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Smith, Geraldine (Morecambe and Lunesdale) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Viggers, Sir Peter (Gosport) (Con)
Wilson, Phil (Sedgefield) (Lab)
Alan Sandall, Mick Hillyard, Committee Clerks
† attended the Committee

Public Bill Committee

Tuesday 4 November 2008


[Mr. Roger Gale in the Chair]

Banking Bill

Clause 4

Special resolution objectives
Amendment moved [this day]: 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.’.—[Mr. Hoban.]
4.30 pm
The Chairman: I remind the Committee that with this we are discussing 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.
Mr. Mark Hoban (Fareham) (Con): Welcome to the 10th sitting, Mr. Gale. I had just taken an intervention from the hon. Member for South-East Cornwall before we adjourned; we were discussing my proposal to include a competition objective in the Bill, so that the issue is recognised and used when determining how the tools—the stabilisation powers, the bank insolvency procedure and the bank administration procedure—are used. We must think about the powers, not only in the context of the five objectives, but also the potential further objective of avoiding the competitive impact that a bank subject to those powers could have.
The hon. Member for South-East Cornwall alluded to the possible tension between a competition objective and a bank’s ability to repay taxpayers’ funds quickly. We talked about that in the context of Northern Rock earlier. Restricting the ability of a bank that is subject to one of the powers to compete could delay the repayment of any financial assistance that that bank had received from the taxpayer, because it would not be in a position to attract new funds from retail depositors, for example. Conversely, if the restriction was on offering mortgages and lending, that might hasten its ability to repay taxpayers’ money, depending on the dynamic and the particular competitive effect that we want to deal with. As we discussed before lunch, there are tensions within the objectives in the Bill and within some of the proposed objectives, but it is important to understand the role that the objectives will have and how they will shape decisions that the tripartite authorities will make about the stabilisation powers.
Two points emerge from the code in relation to the objectives. Paragraph 17 of the draft code states:
“Following actions taken under the SRR, the Authorities must make public statements explaining (a) how they have acted with regard to the SRR objectives; and (b) how they have balanced the objectives against each other”—
which refers to the tension that we have been debating.
“The form such an explanation will take will depend on the circumstances.”
Can the Minister say how long we shall have to wait for such a statement after the powers have been used? Will it accompany the exercise of the powers or will it appear a couple of months later, after the powers have been exercised? Obviously there is an issue about timing and the nature of the information that can be disclosed by such an explanation. Paragraph 18 of the code points that out:
“It should be noted that it will not be possible to divulge certain information, for example information the release of which would threaten financial stability or the confidence of the banking system.”
Clearly the longer that is left, the more information could be received, but it will also mean that market participants will be in the dark about why the authorities have taken the steps that they have. The sooner the information is released the more difficult it is to give a full explanation. Does the Minister see that tension being resolved?
Does the Minister feel that the Treasury statements released in the aftermath of the FSA’s triggering the threshold conditions for Kaupthing and Heritable constitute a template for what we should expect under clause 17? I hope that the answer is no, because the statements did not clearly explain why the Government were taking those actions. I shall return to that point in a little more detail on clause 7, which deals with the threshold conditions.
Secondly, I want to understand the interaction between the objectives of the FSA under clause 4 and the Financial Services and Markets Act 2000. The subject is raised in the code. Paragraph 16 states:
“The sole exception to this rule relates to a decision taken by the FSA, under section 7 of the [Act] that the general conditions for use of the SRR have been met. This decision will be taken in the context of FSA’s objectives under the Financial Services and Markets Act 2000”.
I appreciate that we could cover the subject in more detail when debating clause 7, but there seems to be a carve-out later in the Bill saying that the objectives in clause 4 will not be applied to the exercise of the powers under clause 7. It would be helpful if the Minister were to elaborate on the interaction between the objectives of clause 4 and the 2000 Act, and specifically why they are carved out in clause 7.
One of the challenges in trying to understand the objectives and their application is the lack of transparency in the Bill, the explanatory notes and the code on how they will interact, and on how they will return the powers that could be used under parts 1, 2 and 3 of the code. The code is meant to be a safeguard on the exercise of power. I would have expected it to say rather more about the interaction of objectives.
The amendments are probing; we seek to understand the scope of the objectives, how they work together and how they relate to other aspects of the Bill, including references to the protection of creditors and compensation that are not reflected in clause 4. I want to know how those objectives will work, why they are limited to five and why they do not include competition and the protection of creditors and shareholders. We would be comfortable if the Minister were to give a fairly full explanation on those points. We look forward to his doing so.
Mr. Colin Breed (South-East Cornwall) (LD): I wish to speak to amendment No. 74, which is in my name and that of my hon. Friend the Member for Southport. As I said this morning, it is complementary to the other amendments to this important clause. However, it is particular in adding to the third objective, that of protecting depositors. As the hon. Member for Fareham said, it should cover depositors in the widest sense; I assume that it means retail depositors, but it may include others.
The amendment would add the words
“to protect and safeguard the value of the enterprise.”
That is important when we come to the use of the special resolution and the stabilisation powers, which are set out in clause 4(2)(a) rather than in banking insolvency or administration procedures. At that stage, the bank may well be trading—indeed, it is likely to be trading—and will not necessarily be a failed bank. It might become a failed bank, but at that moment it will not be failed in the legal sense. Paragraph 9 of the draft code of practice reads:
“The term ‘protection of depositors’ refers specifically to the objective of protecting depositors from the effects of the failure of an institution”.
The actual moment of failure is an important aspect. When a bank has failed—perhaps gone into insolvency or administration—that is one thing, but before that, it is considered whether the bank is going to be a failure. Paragraph 9, about which I have some other comments to make, mentions
“the effects of the failure of an institution, as an end in itself”.
Mr. Mark Todd (South Derbyshire) (Lab): I think that the evidence of the internal audit was that it was not on any list for close attention. That was one of the major problems with Northern Rock: it was attended to all too little.
Mr. Breed: It may have been attended to all too little, but the FSA had it on close watch from January. The report says quite clearly that it had been brought to the attention of the directors. It had been perceived as an outlier in terms of its chart and what it had done, and it was working with the FSA. Nevertheless, it does not matter whether it happened in January or in March. It was quite some time before the events of August, when it actually failed. Northern Rock was in intensive care, which may be the sort of situation in which we find ourselves if the special resolution regime is imposed in future. Banking organisations might begin to display all the potential signals that they are heading towards the rocks, but at that moment, they might not be.
It should be necessary to ensure that the overall value of the entity, which is often in large part goodwill rather than just tangible assets, is maximised for everyone during that period. Of course, once it goes into administration or insolvency, there are clear rules about how the administrator may act, but until that happens and while it is still under the stabilisation powers, it is important that consideration be given to maximising the value of the bank in its fullness. That is consistent with directors’ duties to promote the success of a company under section 172 of the Companies Act 2006. During the period of intensive care that may precede the failure of the bank, it is important that that principle is maintained. That is the purpose of the amendment.
4.45 pm
I readily accept that this is a subjective judgment on timing, and timing is all important in such matters. While things can go on for quite a few weeks, matters often come to a head quickly and something happens. We may therefore go from an attempted stabilisation to a wholesale failure. It is important, however, that when we think about protecting the depositors, which I know is the main thrust of the legislation, we do not lose sight of other aspects of the bank. We know, for instance, that large pension funds are normally significant investors in banks.
Mr. Peter Bone (Wellingborough) (Con): The hon. Gentleman is making a good point. I wonder whether he has a view on the following. I understand from these objectives that the Government are not talking about the normal business relationship and the normal duty of directors to look after the whole of the company, but are saying that they will look after a specific group of creditors, that is, the depositors. Does the hon. Gentleman agree that that looks as though the Government are sinking?
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