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. I
also do not agree that the objectives that the hon. Gentleman proposes
in amendment No. 76 should be included in the Bill. The amendment
proposes that the protection of creditors should be a separate SRR
objective. Let me set out why I do not believe that that part of the
amendment is necessary. First, as I have said, objective 5 operates to
ensure that any interference with the rights of creditors must be in
the public interest and proportionate.
Secondly, there are in addition a number of specific features of the SRR
that operate to protect non-depositor creditors, such as the protection
of set-off and netting arrangements in the case of a partial transfer,
which we will discuss in due course when we come to clause 43.
Furthermore, I draw hon. Members’ attention to the compensation
provisions that we have provided, particularly the possibility of
compensation being payable to creditors under a third party
compensation order. In relation to partial transfers, there is the
additional safeguard, reflected in clause 55, of ensuring that no
creditor would be worse off than in a whole-bank 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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