Banking Bill

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Mr. Bone: Will the Minister give way?
Ian Pearson: Prolonging the discussion will not particularly help in this case.
Mr. Bone: It would help me.
Ian Pearson: We think that these are the right objectives. What is important is that we have the flexibility to look at the appropriate balance of such objectives on a case-by-case basis.
Mr. Bone: Will the Minister give way?
Ian Pearson: Oh, go on then.
Mr. Bone: I am grateful for the gracious way in which the Minister gave way. Will he go away and think about the matter? Clearly, he is correct in what he says. However, that is not what the clause says. We cannot have all the objectives jumbled together; we have to have some primary ones. The Minister is right to say that the two primary objectives are financial stability and depositor protection, and that is all that needs to be said in the clause. I know that the wording will not be changed now, but perhaps the Government can go away and reflect on it.
Ian Pearson: I do not want to go away and reflect on it, actually, because we considered the measure at some length before coming to the conclusion that these are the right objectives. Together the objectives capture the public interest that should be pursued in operating the special resolution regime, and are the most important factors to which the authorities should have regard when taking action under the SRR. That is why we believe that including the objectives in the Bill provides guidance to market participants and other stakeholders as to how the SRR powers will be used.
We believe that it is impossible to define the objectives exhaustively. The concepts at issue are too complex to be reduced to hard-edged statutory definitions. The applications of the objectives may well change over time. That is why we have the code of practice, to elaborate in more detail how the objectives are to be interpreted and applied. That was the point that I made to the hon. Member for Fareham earlier.
Let me now turn to the amendments that have been proposed on the objectives. I hope to reassure the Committee that the issues that have been raised are already appropriately dealt with in the Bill as it stands. I want to make it clear why I do not believe that we should amend clause 4 in the manner that has been proposed.
In discussion of the detailed definition of the SRR objectives as set out in the code of practice, let me explain why I believe that both the second and third objectives, as set out in the Bill, implicitly include the concepts of access to deposits and ensuring continuity of banking services. If there is any doubt regarding that, the code of practice, to which the authorities must also have regard, makes it explicitly clear. I do not believe that amendment No. 77 is necessary.
Amendment No. 74, tabled by the hon. Members for South-East Cornwall and for Southport, calls for a requirement
“to protect and safeguard the value of the enterprise”.
I presume that means the enterprise value of the failing bank. The enterprise value of a company is usually made up of a number of elements, including the market capitalisation of the bank. That is the market value of all its shares in issue in addition to the value of its debt financing and other liabilities. I do not believe that a core objective of the SRR should be to protect this measure of the value of a firm. When a failing bank enters the SRR, the stabilisation options in the Bill are deployed because the authorities believe that they are necessary in the public interest. At this point, it is the Government’s view that the wider public interests of financial stability, depositors’ interests and protection of public funds may well outweigh the commercial interests of the bank.
I want to reassure the hon. Member for South-East Cornwall that a number of specific features of the SRR will operate to safeguard and protect the value of the failing bank. The Bill is designed so that the stabilisation options of a transfer to a private sector purchaser, such as a transfer to a bridge bank or taking the bank into temporary public ownership, can be applied before the insolvency threshold has been reached. In turn, that helps to protect against the destruction of any residual value that the failing bank has upon entering insolvency. I think that that addresses the hon. Gentleman’s point.
I should also like to draw the attention of the hon. Member for South-East Cornwall to clause 53, which introduces the bank resolution fund. The fund, which is compulsory for a bridge bank but optional when taking a bank into temporary public ownership, is designed to ensure that the proceeds of any resolution, minus deductions necessary adequately to safeguard public funds, must flow back to the failing bank. If the Bank of England or the Treasury put in place a bank resolution fund, the resolution fund order may place a duty on the authorities to maximise the proceeds available for distribution, subject to meeting the special resolution and bridge bank governance objectives. I believe that that mechanism should also help to achieve the result that the hon. Gentleman is looking for. I therefore hope that he does not press the amendment to a Division.
Amendment No. 78, tabled by the hon. Member for Fareham, proposes that we state that the expenditure of public and private funds is done in an economically efficient manner. Of course I agree with the intention of the amendment, but again, I am not convinced of the argument to make it an objective of the special resolution regime. First, there are adequate general mechanisms to monitor and provide oversight of the use of public and private funds by the Government and other public bodies. In addition to the value-for-money and propriety analysis that the Government will undertake before providing financial assistance, there are external mechanisms to ensure that assistance is provided in an appropriate manner, for example through the work of the National Audit Office.
If the hon. Gentleman is referring to funds of the FSCS when he mentions private funds, I should say that we have put in place a number of provisions to ensure that they are used in an appropriate manner, when called on to fund the SRR, as in clause 157. I refer him in particular to the requirement that any resolution costs that the FSCS must contribute should be independently verified, and the core principle that the FSCS cannot contribute more than it would have had to pay out to insure the depositors had the bank entered insolvency.
We can certainly agree that the interests of creditors need to be taken into account when determining whether the SRR should be deployed and that their interests need to be respected, but we do not think that it is appropriate to provide expressly for the protection of creditors as a separate objective from the protection of depositors. Creditors, to a much greater extent than retail depositors, can take a number of steps to protect themselves in the event of counterparty failure, including taking security and adopting set-off and netting arrangements. When creditors stand unsecured, they do so in the knowledge that that is the case, and having secured a suitable rate of return on the terms of their liability with the bank. None of that is the case with depositors. The Government have made it clear that the class of creditor that the measures focus on protecting is the depositor class, both as an end in itself, and because of the important role of depositor protection in financial stability.
5.15 pm
Finally, I should like to turn to the important topic of competition law. I believe that the intention behind amendments Nos. 76 and 79, tabled by the hon. Member for Fareham, is to ensure that a bridge bank or a bank in temporary public ownership does not take commercial advantage of its favourable position in terms of Government support in a manner that distorts the market for financial services as a whole. He made that point clearly in his contribution.
Again, I reassure the hon. Gentleman that we have put measures in place to meet that intention. The first is the code of practice, the draft of which includes measures regarding the running of a bridge bank or a bank in temporary public ownership and guidance on running the bank on a conservative basis. Furthermore, both bridge banks and banks in temporary public ownership will continue to be regulated by the FSA in the same manner as other financial services providers. The Office of Fair Trading will continue to keep the relevant markets under review in order to protect the interests of UK consumers and the British economy. As the amendment addresses the running of bridge banks and banks in temporary public ownership rather than the general operation of the special resolution regime, I argue that the measures that I have set out meet his aim more appropriately.
The hon. Gentleman also probed the extent to which banks in receipt of financial assistance will be permitted to take advantage of that assistance in an anti-competitive manner. That is an important point. It is crucial that banks cannot use the receipt of financial assistance to obtain an inappropriate competitive advantage. I reassure him that firms in receipt of financial assistance will still be subject to the provisions of competition law and that the competition authorities will continue to have the powers to investigate any breaches. As I have said, the Office of Fair Trading will continue to keep the relevant markets under review in order to protect the interests of UK consumers and the British economy. Additional restrictions may also be imposed on those in receipt of financial assistance in order to comply with the rules on the provision of state aid.
Returning to the point about priorities, the hon. Member for Fareham made the Government’s argument for us when he pointed out that the weighting of the different objectives outlined in clause 4 may change in different times and contexts. He is absolutely right. It illustrates why we should not attempt to rank objectives in the Bill, despite the injunctions of some Opposition Members. To give one example, in cases where significant public financial assistance had been committed before the special resolution regime, objective 4 on the protection of public funds would be likely to increase in importance, but it is not possible or desirable to put into the Bill the sorts of trade-off that the hon. Member for Fareham discussed or to stipulate in advance what they might be.
The hon. Member for South-East Cornwall sought assurance that the aim is to preserve a viable entity. I confirm that that is exactly the case. Before the SRR operates, the objectives of the bank’s management and the FSA as its regulator will clearly be to run it as a going concern. Once the bank is in the SRR, subject to the objectives that we are debating, the authorities’ aim will be to preserve the business or part of it as a viable business entity. All along, pre-SRR, we want businesses to continue as going concerns. Once a business is in the SRR, the first point is to preserve all or some of its parts as viable business entities.
I hope that I have demonstrated that the SRR objectives in the Bill strike the right balance between being clear about our primary aims and the purpose of the SRR measures and protecting other important rights and interests. I also hope that my explanation of other measures in the Bill and the code of practice address the concerns raised in the amendments. I hope that that provides adequate reassurance that we have taken those important matters seriously, that hon. Members, who I think tabled the amendments in a probing spirit, will not press them and that we can agree that clause 4 should stand part of the Bill.
Mr. Hoban: I thank the Minister for his full reply to our debate on clause 4. Given his remarks, I want to reflect on a few points. We had an exchange during his speech about what was meant by “depositor”. I am still concerned that the Bill deals with depositors in a rather broad way. The explanatory notes do not clarify the position, so we are reliant on a non-binding code of practice for a clearer definition.
I do not want a local authority or charity depositor to look at the objectives and say that the Government had not protected them because they had been ranked alongside the window cleaner and the person who provides the stationery when it comes to the payout on administration for insolvency. I believe that we need greater clarity about the different levels of protection given to the different types of depositors in the various sectors. A retail depositor has a very different set of protections from a non-retail depositor. That does not come across, either in the Bill or in the explanatory notes, and it is not as clear as it could be in the code of practice. It is important to make it absolutely clear to depositors what protection they are likely to receive under the scheme.
There is a gap that the Government need to consider on the question of financial stability. The working definition used in the evidence session at the start of the process by the Bank’s executive director for financial stability, Nigel Jenkinson, was narrower than the definition in the code of practice. We could end up with the Bank believing that it was accountable for one thing in the context of how it operates, with the code of practice expressing financial stability in a wider fashion. The two should be more closely aligned, so that all the tripartite authorities know exactly what is meant by financial stability.
It was conceded on Thursday that this business should be covered by the Bill, but the Bank and the Treasury should be singing from the same hymn sheet. I am not sure that they are. That will add to the confusion over the respective roles of the Bank and other tripartite authorities and how financial stability is to be addressed under the Bill, particularly under part 1. More work needs to be done on that aspect.
The balance of objectives is dealt with in subsection (9); my hon. Friend the Member for Wellingborough debated it with the Minister, and I touched upon it in my remarks. One part of the challenge is that people will need to know how the objectives work together in different circumstances. One objective of the code—we will talk about it in our debates on clause 5—is to give some clarity and predictability. Clause 5(2)(a) is about how to achieve the special resolution objectives. We need a window in the code on how they interact at different times. I agree that they may vary; indeed, the code reflects on the fact that they may vary, depending on the time.
I drafted amendment No. 77 before I saw the draft code. Paragraph 10 of the code makes much clearer how depositors might be protected. Amendments Nos. 74 and 76 are on the value of the enterprise and the interests of the creditors respectively. I am not sure whether the safeguards identified by the Minister are sufficient to reassure creditors. The safeguards come across almost as a second-order priority, because they are to be dealt with in secondary legislation or in a different clause. The fact that they are not in clause 4 indicates that creditors’ rights are not as important, and the Government’s thinking on ensuring that value is left in the business for creditors does not seem as important as some of the other objectives in clause 4. I am not sure whether the Minister has addressed that point fully, and we might want to return to it later.
The Minister teased apart the issue of whether we are dealing with public or private money. I want to touch on the efficient use of private money, which we will probably deal with in more detail under clause 157 about the funding of the regime. There is a provision in the Bill to verify how the money is spent—like an audit. From my accountancy training, I know that an audit does not necessarily show that money has been spent well or efficiently.
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