Banking Bill

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Mr. Bone indicated assent.
Mr. Hoban: I expect my hon. Friend was both a client and an auditor at different stages of his career before he came to the House. An audit does not provide exactly the reassurance I seek in amendment No. 78. I accept the point about public money—that the NAO is there to provide an external check, and that before spending taxpayers’ money the Treasury will go through its own processes to determine whether that is the best way to resolve the crisis; however, the provision for independent verification of the use of the funds that the banking sector will provide to the FSCS, to meet some of the costs of resolution, does not necessarily go far enough.
On competition, I think that the Minister set out to reassure us that there are sufficient checks on an institution that has been subject to one of the stabilisation tools, to ensure that it does not act anti-competitively. During the debate on the code, I might touch on the meaning of “conservative” in the section dealing with temporary public ownership. The Minister has acknowledged the importance of ensuring that the right arrangements are in place so that banks in receipt of public financial assistance are not unfairly advantaged. It would be wrong to advantage banks that are seen to have failed, to the detriment of those that seem to manage their businesses successfully without recourse to public funds. On that basis, and with the reservation about creditors, I beg to ask leave to withdraw the amendment. I will not seek permission later to press any of the other amendments in the group to a vote.
Amendment, by leave, withdrawn.
Clause 4 ordered to stand part of the Bill.

Clause 5

Code of practice
5.30 pm
Mr. Hoban: I beg to move amendment No. 81, in clause 5, page 3, line 35, at end insert—
‘(ca) how to determine whether the threshold conditions under section 41(1) of the Financial Services and Markets Act 2000 will be breached,’.
The Chairman: With this it will be convenient to discuss the following: Government amendment No. 89.
Amendment No. 80, in clause 5, page 4, line 3, leave out ‘have regard to the code’ and insert
‘comply with the code or publish an explanation of why they were unable to comply with the code in good time after their actions,’.
Clause 5 stand part.
Amendment No. 82, in clause 6, page 4, line 11, leave out ‘and’.
Amendment No. 83, in clause 6, page 4, line 14, at end insert ‘, and
(d) those persons whom it considers to have relevant knowledge of those matters.’.
Amendment No. 85, in clause 6, page 4, line 17, at end insert
‘only after complying with the requirements set out in subsection (1).’.
Amendment No. 84, in clause 6, page 4, line 18, at end add—
‘(5) The code shall not come into force unless it has been approved by a resolution of each House of Parliament.’.
Clause 6 stand part.
Mr. Hoban: The code of practice in clause 5, which we have already referred to quite a bit today, is seen by third parties as an important part of the legislation, because it is one of the tools that would give the market comfort regarding how the powers in parts 1, 2 and 3 will be exercised. It is therefore important that the code gets it right and that there is sufficient guidance in it to enable people to predict reasonably well when and how the powers will be used. Subsection (2) of clause 5 sets out some of the guidance that will be included in the code. I will start by talking about my amendments, and then speak more generally about clauses 5 and 6 stand part.
My amendments aim to highlight some of the potential deficiencies in the code as currently drafted. Amendment No. 81 inserts some additional guidance on the context. It reads,
“how to determine whether the threshold conditions under section 41(1) of the Financial Services and Markets Act 2000 will be breached”.
The code, to be fair, refers to that. Paragraph 28 states:
“The FSA’s Handbook contains rules and guidance relevant to an authorised firm. In particular, within the FSA Handbook, the ‘COND’ Threshold Conditions contains rules and guidance on the threshold conditions. There are a range of conditions, including: legal status and location of offices; the adequacy of the firm’s resources (financial and non financial) in relation to the regulated activities which the firm carries on; and suitability issues (e.g. competent and prudent management, conducting business with integrity and in compliance with proper standards). These are set out in more detail in the FSA Handbook.”
I am not sure whether the code really provides the guidance that people need to determine whether the threshold conditions will be breached, or which threshold conditions in particular the Government are interested in. For example, one of the threshold conditions not referred to in paragraph 28 is the appointment of a claims representative. I do not know whether the breach of the appointment of a claims representative will trigger the special resolution regime. I hope it does not, but part of the problem is that we are left none the wiser in the code as to whether that is the case.
On the matter of the location of offices, I printed off the relevant section of the conditions handbook to see whether it might provide me with some more detail. It states that
“if the person concerned is a body corporate constituted under the law of any part of the United Kingdom...its head office, and...if it has a registered office, that office, must be in the United Kingdom.”
Would the fact that a FSA-regulated firm decides to change its head office and move out of the UK be sufficient to trigger the special resolution regime? It may be sufficient to remove its authorisation, but do we really want to go down the route of triggering the special resolution regime if a firm happens to change its head office?
The explanatory notes to condition 2.2 talk about how a firm’s head office might be defined. It is not defined in the Act apparently, nor in the post-BCCI directive, nor in the insurance mediation directive. The FSA handbook states:
“This is not necessarily the firm’s place of incorporation or the place where its business is wholly or mainly carried on. Although the FSA will judge each application on a case-by-case basis, the key issue in identifying the head office of a firm is the location of its central management and control, that is, the location of: the directors and other senior management, who make decisions relating to the firm’s central direction, and the material management decisions of the firm on a day-to-day basis”.
I am not clear whether a breach of that threshold condition is sufficiently important for the stabilisation powers to be used. If it is important we need some guidance in the code to say why. Where the Government are coming from in the threshold conditions is not really about the location of the head office or the appointment of a claims representative—it is about the adequacy of resources. That, to my mind, is the sense of where the Government got to on Kaupthing and Heritable, but all that we know in the context of those two institutions is that the FSA judged that the threshold conditions had not been met. I do not know why the FSA made that judgment and the reason was not apparent from the Treasury’s press release on the topic.
If we are talking about adequate resources we should say so in the Bill and the code. We should give people some guidance in the code as to what it means if adequate resources rules have not been met because I think they are subjective terms. I shall give an example from the FSA’s online handbook:
“FSA will interpret the term adequate as meaning sufficient in terms of quantity, quality and availability, and resources as including all financial resources, non-financial resources and means of managing its resources; for example, capital, provisions against liabilities, holdings of or access to cash and other liquid assets, human resources and effective means by which to manage risks.”
That is a very subjective definition of the meaning of adequate resources. We do not necessarily want the FSA to be tied to a quantitative definition but we require some guidance in the code as to what the FSA would deem inadequate resources, to give a flavour of the sort of areas we are looking at. The code is currently deficient in not providing that detailed guidance, which is why I propose amendment No. 81.
On amendment No. 80, the current situation under subsection (4) is that the authorities must have regard to the code. I think the term “have regard to” is too weak. The authorities might read it, not be very interested, throw it away and not be bound by it, but it is a key part of the structure of this series of reforms and the code is seen by the outside world as an integral part of the package. Simply to “have regard to” the code is not strong enough to give the right degree of emphasis when bearing in mind the powers set out in part 1. That is why I have suggested in my amendment that the requirement should be on the tripartite authorities to comply with the code or publish an explanation of why they were unable to do so,
“in good time after their actions”.
Comply or explain is a term that is used quite often by businesses in their accounts. If something does not comply with the code, they explain why. I am suggesting that the same principle should be used in the provisions.
Some other omissions might be dealt with on a stand part basis. Paragraphs 2 to 13 of the code, which set out how the objectives in clause 4 are to be defined, do not go far enough in detail, although we have dealt with that point in the previous debate. Paragraph 29, on page 7 of the code, uses curious language that leads me to think—although I do not think this is the right interpretation—that the default tool for the Bank to exercise is the bank insolvency procedure. Paragraph 29 says:
“Under section 8 of the Act, the Bank may only exercise a resolution tool other than the bank insolvency procedure if satisfied that the exercise of the power is necessary”.
It is almost as if the Bank of England will start on the basis that it will exercise the bank insolvency procedure unless it thinks the powers in paragraph 8 that enable it to have a private sector purchaser or bridge bank are better. I assume that the default is private sector purchase, that the bridge bank is the second preferred option, and that temporary public ownership or the bank insolvency procedure rank further down the list of priorities.
Mr. Todd: The hon. Gentleman highlights a concern that I share. The code is silent on whether the institutions involved should just stand aside and let the bank collapse, on the basis that its collapse poses no systemic risk to financial stability in the UK. That implication is not set out in the code; in fact, the default position is that the authorities will take some action, almost no matter which financial institution is involved, on whatever scale and however isolated the impact might be. I would welcome the greater clarity in the simple position: “This is a matter for the market to resolve. We shouldn’t be involved at all.”
Mr. Hoban: I think I understand where the hon. Gentleman is coming from—it relates to the clarity of the code and what the code says the default options should be. As I understand his view, it is that the instinctive reaction is that action should be taken, rather than that the market should run its course and the bank should end up in administration or insolvency. The drafting of paragraph 29 certainly suggests that the expectation is that default will end up in administration or insolvency, rather than that all the stabilisation powers should be used first. Perhaps the language needs to be clarified further to get it right so that we can understand the sequencing or the priorities.
Mr. Todd: Will the Committee permit me to clarify a little further? It is important to emphasise the moral hazard position, which is that the public sector should not be expected to step in whenever an institution appears to be threatened. The last few months have almost given the impression that whatever institution is threatened and whichever group of savers might find their savings in jeopardy, the public purse will step in to resolve the matter. The code is an opportunity to make it absolutely clear that that is not the case. There are circumstances in which an institution may be permitted to collapse because it does not pose a systemic risk to the financial stability of the UK, but the last few months have allowed us to drift away from that debate.
Mr. Hoban: The hon. Gentleman makes an important point. I am not entirely clear in my mind whether that issue has been properly addressed throughout the crisis. The hon. Gentleman makes the point that before the crisis started, the assumption would be that the market would work its way through some of these issues, that the deposit protection scheme and the Financial Services Compensation Scheme were there to protect consumers and that if a bank collapsed, that would be the route. That goes back to the moral hazard point of view—the warning to investors, creditors and depositors: “Don’t expect to be bailed out. You need to think about your own position.”
During this crisis, we have moved to a situation where it is expected that our Government and Government generally—the crisis affects countries outside the UK as well—will leap to the rescue; and to use the Minister’s phrase from the evidence session, that we will do whatever it takes to solve the problem. One of the Treasury’s challenges in writing the code is to write it in a way that covers both our present situation and what happens when financial stability returns. That goes back to the comment made during the last debate about the context in which such decisions are made. In a time of financial instability, a different set of decisions might be made from those that would be made in a period of financial stability, when moral hazard may well come back to the fore. However, it is important for the code to distinguish clearly between the two situations, and what the impact will be. It is difficult to draft the bit about what the impact would be, because that itself could lead to a degree of uncertainty, but it would be helpful to be able to tease apart the two different contexts.
5.45 pm
Mr. Breed: I entirely agree with the hon. Member for South Derbyshire. We have, to an extent, drifted away from what was the norm only a few months ago. Of course, there is no obligation on the Government to use the powers; they may not consider the time appropriate to use them. The powers are very clearly designed to protect depositors—there is no qualification to that. They may be depositors of very significant funds—well in excess of the compensation scheme limits—and if there was a qualification, standing back and letting the bank go might be perfectly acceptable. Some of the objectives have made that position more difficult, which is a slippery slope that I suspect may make Governments wish to return to something more akin to the norm with moral hazard; otherwise, they will be inveigled into trying to come in under special resolutions to protect almost any situation, because of the extent of the deposits.
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