 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 CommitteeTuesday 4 November 2008(Afternoon)[Mr. Roger Gale in the Chair]Banking BillClause 4Special
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”. What
concerns me is that it is likely, as we found out in Treasury Committee
meetings on Northern Rock, that the FSA was aware of some of the
problems with
Northern Rock some months before it failed. Although the bank was
considered in many respects to be an outlier in how it secured
wholesale funds and so on, it was given time to try to put it right.
The fact that it did not do so, or that the FSA did not insist that it
do so, is another matter, but during that period the bank was not
failed. It was trading, receiving deposits and entering into mortgage
arrangements, and although it was perhaps on the list for close
attention, at that moment in time it had not
failed.
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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