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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