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withdrawn.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
5Code
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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