Banking Bill

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Mr. Breed: That certainly may be the impression. As I said, the main thrust of the legislation is to protect depositors. We should not lose sight of the fact that prior to actual failure—when there are clear rules for the way in which administrators may undertake their duties, and the relative classes of shareholders, creditors and so on are more easily established—if one still has a going concern, although it may be limping along, it is important to recognise that directors have other duties. There may well be an opportunity to rescue the situation before it goes into failure, and to have regard for maximisation. Once intervention happens, share prices can disappear and the value of the entity can evaporate overnight. It is important that we do not lose sight of the objective that while there is still a going concern, the creditors and shareholders should have at least some say in what is going on.
It would be helpful if the Minister gave us some basic assurances that in the period when stabilisation powers are being introduced and we do not have an actual failure, the Government have a view as to how that is to be handled. At the end of the day, it must be normally in everybody’s interest to try to save the institution and ensure in one way or another that it continues. To have a further contraction, through a merger or a takeover, is not likely to be in the interests of competition. To have a failing bank is not likely to be in the public interest or the economic interest; it is not likely to be in too many people’s interest. It is therefore important that in that period these powers are used, as much to try to ensure the continuation or the maximisation of the value of the whole, as to try to get to a situation where the company is split up, sent off, recast and such, and we have shareholders taking a real bath, creditors losing out, and everything else.
I would be grateful to the Minister if he addressed that period when a company is not insolvent, but is in intensive care, when the directors are doing all sorts of things to try to maintain their business, and if he said something about how these powers will be used in those circumstances.
Sir Peter Viggers (Gosport) (Con): Mr. Gale, rising gives me the opportunity to apologise to you and to the Committee for my mobile phone going off. I thought that I understood the technology; I clearly do not.
My first point is not the most serious one I have ever made in Committee. Under clause 1(5), each of three bodies has a role in the operation of the special resolution regime, and they are listed as the Bank of England, the Treasury and the Financial Services Authority, whereas when we reach clause 4(3), the same three bodies are listed in a different order: the Treasury, the FSA and the Bank of England. The parliamentary draftsman never does anything for no purpose, and I would be curious to know the purpose of that particular difference in listing. The listing accepted in the rest of the Bill is the same as that in clause 4(3), so it must be clause 1(5) that is out of order. That is not my biggest point.
The more important points are that the Bill is predicated on supporting depositors, as the hon. Gentleman has just mentioned. Clause 2(1) talks about accepting deposits. Accepting deposits and the protection of depositors seem to be a prime purpose of the Bill, but there are other bodies and other ways that banking institutions can interface with public confidence.
Increasing confidence is not just a matter of protecting depositors. There have been some quite serious mismatches, which have caused the public and our constituents real concern. For instance, there was a mismatch between the treatment of individual depositors in the Icelandic associate banks in the Isle of Man, such as Kaupthing Singer & Friedlander, where individual depositors are not protected. Similarly there is a mismatch between the individuals who invested money by way of deposits through Icelandic banks and the institutions that invested money through Icelandic banks, such as councils and, as I mentioned earlier, a children’s hospice in my constituency.
There are other ways that banks can interface. If we wish to protect confidence, it is not just a matter of ensuring that deposits are fair. For instance, if a bank were involved in, for example, bills of lading, and the bills of lading failed, that would cause a loss of confidence. It would not just be a matter of losing deposits. A breakdown in money transmission would have a significant impact on confidence. A fault in the custodian system, whereby pension funds are held by banks, would cause a problem. If a bank failed in its capacity as either a trustee or a factor of money, that would cause a problem.
We have already noticed that investment banks are not covered by the rules on the protection of depositors. What would happen to investors in banks where there is no deposit because the interest is payable under sharia law and is a shared venture? What is the rule there? My questions come down to this. Which depositors are protected? Is it UK individuals only or is it every UK institution, as there has been a mismatch so far? Secondly, depositors in what? Is it just depositors in UK banks or depositors in UK institutions as well, or depositors in overseas institutions, including banks?
My question can be summed up as follows: if the object of the exercise is to protect confidence by ensuring that depositors are protected, then a more careful definition of exactly what institutions will carry this cover is needed. What institutions have the reputation that if a deposit through them is lost, the UK Government will stand behind them through the special scheme?
There is insufficient clarity here. Lawyers acting for banks and other financial institutions will be all over this Bill when it is an Act. They will look for the interstices in it and clever ways of getting protection, which we perhaps have not anticipated. I would be a little happier—we may come to this when we consider the draft code of practice—if the law had been cast in more general terms and enabled the Bank of England to do such things as may be necessary to protect deposit and other customers of banks. But that is perhaps for a later discussion.
The Economic Secretary to the Treasury (Ian Pearson): Lawyers have already been over the Bill. They continue to go over it in substantial detail. The amendments seek to add to the objectives for the special resolution regime set out in clause 4. Before dealing with them in turn, I should like to set out the thinking behind the objectives we have put forward in the Bill and explain why I think they are the right ones.
The clause sets out the special resolution objectives, which are intended to present in primary legislation the broad purpose of the measures we have put in place and the aims that the authorities must have regard to when exercising their powers under parts 1, 2 and 3. I hope that the hon. Member for Gosport welcomes the fact that we are doing this at a broad level.
We have consulted widely on these objectives and they have received strong support. While the objectives are not defined in the Bill, the code of practice, which the hon. Member for Fareham referred to and which was sent to members of the Committee on Thursday, provides further information on their meaning and effect.
I will help the Committee by summarising what the draft code says as to the meaning of these objectives, as this touches on some of the points that hon. Members have already made in the debate; they are also covered in the amendments. Members will, I hope, forgive me if much of the following quotes extensively from the code, but it is important that these definitions are made clear before the Committee today, in order to inform debate.
The term
“stability of the financial systems of the United Kingdom”,
used in objective 1, refers to the stable functioning of the systems and institutions—including payment and settlement infrastructure—supporting the efficient operation of financial services and markets for purposes including capital raising, risk transfer and the facilitation of domestic and international commerce. As the Committee discussed last Thursday, there are a number of possible definitions of what stability does, or could, mean in different contexts; this definition provides a clear explanation in terms of the stability of the UK financial systems.
The intention of this initial objective is first, to recognise the wider systemic risks posed by the potential, or actual, failure of any institution or group of institutions. Secondly, it requires the authorities to have regard to the likely systemic impacts of their actions, or non-actions, when implementing an SRR tool.
Mr. Hoban: The Minister referred, as I did, to last Thursday’s debate about financial stability. Does he not agree with me that the definition set out on financial stability in the code is likely to be the one by which people will judge the achievement of the effectiveness of clause 216? Will this in effect become the definition of financial stability? Should that not be recognised in clause 216, as well as in the code?
Ian Pearson: For the reasons that I outlined last Thursday, it is right that we do not put a detailed definition of financial stability in the Bill. We believe that the right place to do that is in the code, which is why we provided that clarification in terms of our understanding of objective 1.
Objective 2, and the term
“public confidence in the stability of the banking systems”,
refers to the crucial role that public confidence has in maintaining the stable and efficient operation of financial services and markets. The confidence of the general public is of particular significance in maintaining stability in a banking system whereby it is important that banks’ deposit liabilities exceed the liquid assets that they hold at any one time.
Public confidence has a number of dimensions. For example, it refers to the expectation that deposits will be repaid on demand; normal banking services will be continuously available; problems—or perceived problems— in one bank or building society will not extend to other banks; and if a bank or building society does fail, systems exist to protect the interests of depositors.
The intention of the second objective is to ensure that the authorities have regard to the need to act so that a failing bank or building society will be resolved in a manner that enhances public confidence in the banking system as a whole.
The term “protect depositors” in objective 3 refers specifically to the objective of protecting depositors from the effects of the failure of an institution, as an end in itself. That objective goes beyond the need to ensure public confidence in the banking system, and recognises the important public policy objective of ensuring that depositors in a failed institution are adequately protected.
Under the Bill, such protection can be delivered in different ways, such as by facilitating fast payout, or account transfer, under the Financial Services Compensation Scheme to eligible depositors through the bank insolvency procedure, or facilitating continuity of banking services through the stabilisation options in the SRR.
Public policy concerns around effective depositor protection are particularly relevant in the case of retail depositors protected by the Financial Services Compensation Scheme. Protection of retail depositors is also likely to be conducive to realisation of a number of other objectives, such as protecting and enhancing public confidence in the banking system. However, the use of the SRR may also offer protection to other types of depositor, particularly where the SRR tool chosen may provide continuity of service to both retail and non-retail customers of a failing institution.
5 pm
Mr. Hoban: May I pick up the comment made by my hon. Friend the Member for Gosport? I want to check that the Minister is right—or that what I take from what he says is right—that depositors as a term expands beyond retail depositors, to cover all depositors. Clearly, if the decision were taken to put a bank into administration, retail depositors would be covered by the FSCS but non-retail depositors would rank alongside other creditors in terms of distribution. They might argue that the choice of mechanism made by the authorities did not protect them while it did protect retail depositors. I wonder whether the use of the word depositor is not too widely drawn.
Ian Pearson: The objective to protect depositors covers all depositors, retail and wholesale, but I would point out that the focus of the SRR will often be primarily on retail depositors eligible for compensation from the FSCS, as demonstrated by the bank insolvency procedure which is designed to speed up payout to this class of creditors. It is right that the objective covers both retail and wholesale depositors.
The term “protection of public funds” in objective 4 refers primarily to the protection of taxpayers’ interests in the effect of expenditure of public money. The intention of this fourth objective is to recognise the strong fiduciary duty of the authorities, in particular the Treasury, in taking decisions with implications for public funds.
The term in objective 5,
“to avoid interfering with property rights in contravention of a Convention right”
refers to the rights of property holders who might be affected by the use of the SRR. This can include the bank or building society itself, the shareholders, creditors or other third parties. Such persons may hold property in the failing bank or building society or have a right of control over such property, or both. The inclusion of this objective acknowledges the importance of acting proportionately in exercising these powers.
The hon. Member for Fareham asked in the early part of his contribution about the definition of proportionality in the code. This is an issue that has been considered repeatedly both in domestic and international case law. In broad terms, it means that property rights should be interfered with to the minimum extent necessary to achieve the public interest aims, albeit those aims may provide very powerful justifications for intervention.
This clause also notes that the objectives are to be balanced as appropriate in each case. Again, the hon. Member for Fareham invited me to speculate whether particular areas have priority. I want to make it clear that we need to look at these on a case-by-case basis. We have always been clear that our primary objectives are to protect depositors and financial stability, and stakeholders have supported these purposes. We have included other rights, such as protecting property rights, in acknowledgment of the potentially invasive nature of some of these tools. It is right that we judge our action on a case-by-case basis.
Mr. Bone: The Minister has been most helpful but is it not unfortunate that the Bill does not say that the primary purpose is those two objectives? The Minister has said it but the Bill does not say it.
Ian Pearson: We have been clear that depositor protection and public confidence in the banking system are essential. When deciding to take action, it is right that the special resolution objectives should be as we have set out in clause 4. I refer hon. Members again to subsection (9), which says that
“they are to be balanced as appropriate in each case.”
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