Mr.
Hoban: This is a difficult area to get right and I am
pleased that I am in the position of having to criticise the code
rather than having to draft it. It is a much easier position to be in.
The interchange of thoughts about what sort of messages the code sends
out is important, because when drafting the code one needs to be very
careful about the impression that is created in the minds of
depositors, as I alluded to earlier in response to the hon. Member for
South Derbyshire before I took the intervention from the hon. Member
for South-East Cornwall. For example, if there is a very clear
restatement in the code that the limit for deposit protection is
£50,000 and that will apply in the future, we may see the
shuffling of money around banks, post offices and so on, which may
trigger a fresh wave of
uncertainty. We
need to get the balance right. It is important, in general, that we try
where possible to give as much detail about the context as we can, and
to give a degree of predictability even though it may cause some people
concern. The more predictability there is in the code,
the greater the market’s confidence that the code is right and
the greater the likelihood that it will know how the powers will be
used. That is what the code is about—how the powers will be used
and how market participants can be confident that the powers will not
be used will-nilly, at the drop of a hat. We are talking about the
controls and the checks on the exercise of the powers, which is why the
code needs to be detailed at the front end to give people a greater
sense of how the powers will be put into practice. I am not a
great believer in long documents and I always think that it is better
to have a shorter ones, but when I opened the file containing the code
of practice, I was surprised at how short it was given the complexity
of the issues. While this is an early draft, and I suspect that later
drafts may elaborate on some of these issues, this area needs
elaboration. How should people expect the powers to work in—to
use a different analogy—wartime and
peacetime? I
have some more specific comments. Paragraphs 32 and 33 of the code deal
with clause 8 of the
Bill: “The
test of ‘necessity’ is a high one. In determining whether
the exercise of the power is necessary, the Bank must have regard to
whether other approaches would resolve the
situation.” Again,
I am not sure whether there is enough information in the code to
determine when the bank will find it necessary to exercise such powers.
The code is a bit light on timings of when things may happen, so we
need a bit more specificity in that regard. I draw the
Committee’s attention to paragraph 20, which says that there
will be a
“revised
Memorandum of Understanding between the
Authorities” which “will
set out how the Authorities will communicate with each other before and
during the resolution of an
institution”. It
is not clear when that memorandum will be produced, and it would be
helpful to know. When the Treasury Committee debated the matter, it was
suggested that we would see the MOU long after the passing of the Bill.
To help us understand how the authorities will interact with one
another in the context of the Bill, it would be helpful to have sight
of that element of the revised MOU before the Bill completes its
passage through both
Houses. In
paragraph 33, there is a trade-off. It
says: “The
assessment must balance the short- and long-term effects on financial
stability, public confidence and depositor protection of different
resolution
options.” That
is absolutely right; I could not disagree with that statement, but what
does it really mean? What are the short and long-term effects? The
paragraph refers to the need “to protect depositors” but
it does not expand to cover the short and long-term effects on
financial stability or public
confidence. Paragraph
36 of the code refers
to “the
operational risks of managing a bridge bank and the amount of public
funding that may be required to keep it
operational.” There
is no sense of where the economic decision comes into play. We talked
about the protection of taxpayer interests in the previous clause. The
code says
that “the
Bank will need to take into account in determining the feasibility of
different
tools” factors
such as the operational risks of managing a bridge bank and the amount
of public funding that may
be required to keep it operational. I do not get a sense of where the
balance of judgment is between this and temporary public
ownership. Paragraph 40
of the code does not say much apart from paraphrasing conditions A and
B. I think that more work needs to be done on that area if we are to
understand how the Bank, or the tripartite authorities, will act in the
public interest and how they will apply the conditions. I would have
expected more clarity in that
area. Paragraphs
44, 45 and 46 are important and relate to the announcement of the tools
and to accountability. I referred to that matter earlier today in the
context of amendment No. 80, in which I call on the relevant
authorities to comply or explain. Paragraph 46 relates to something
that I mentioned in a previous debate. The Minister responded by saying
how transparent the Treasury would be over the exercise of such powers.
I asked him whether the announcement made by the Treasury in respect of
Kaupthing and Heritable was a model or a template for what we would see
under paragraphs 44, 45 and 46 or whether we would see a fuller
explanation. The Minister did not come back to me on that point, and I
was too slow to pick him up on it, but I will give him a second chance
in this debate to explain—if he has not thrown away the notes
that his officials prepared. That is important, because it helps to
build up an understanding of how the Government will react in the minds
of participants. When people are assessing how the powers will be used,
they will look not only at the code, but at how the measures are
applied subsequently, to see where the gap is between the application
and the code. Therefore, we need to ensure that a decent level of
information is available to help participants to understand the range
of powers. Also, of course, that is an important part of holding the
tripartite authorities to account on how the powers will be
used.
I am not a
member of the Treasury Committee and I was not able to listen to
yesterday’s sitting because I was engaged on the Report stage of
the Dormant Bank and Building Society Accounts Bill, but I suspect that
the Committee would like to debate again Icelandic banks, for example,
in the event of the exercise of the stabilisation powers. The more
transparency about how the powers will be used and the more
announcements that are made about them, the easier it will be for
Parliament to hold the authorities to account, which is particularly
important when taxpayers’ money is
involved. Paragraph
52 begins with the words: “In exceptional circumstances”.
What are exceptional circumstances? Are they so exceptional that the
Government do not expect the measure to be used? It is important to
clarify the definition of exceptional
circumstances. To
go back to time periods, paragraph 60 of the draft code
states: “However,
in situations where there is expected to be a lengthy period of time
prior to a sale, the Bank shall put in place an appropriate governance
structure”. How
long is “lengthy”, and when does one decide when
something has gone from being short to “lengthy”? If the
powers had been available and the Bank had owned the shares in Northern
Rock, it might have thought that it could flog it within a couple of
months. However, I suspect that the gap between the Northern Rock
rescue
in September and its nationalisation in February would be deemed
“a lengthy period” if the powers had been available at
the time, and it may have been necessary to put in place appropriate
governance arrangements. What is “lengthy”? How long is a
reasonable period before steps to put in an “appropriate
governance structure” need to be
taken? In
his remarks on a previous clause, the Minister referred to the
safeguarding in the code of practice of operating strategies. Paragraph
68 states that that
“is likely to
involve the bridge bank operating on a conservative basis, to protect
the franchise value of the business”.
I am not sure what
“conservative” means. Does it mean prudence in the
management of liabilities or when dealing with repossessions? Is it
“conservative” in that the bridge bank does not take any
risks and operates at the less competitive edge of the threshold? Doing
so could impede the achievement of its objectives. Knowing the meaning
of “conservative” in this context would be helpful to the
banking
system. I
appreciate that no one expects a bridge bank to exist for too long a
period—that is not necessarily its purpose—because there
could be other ways in such a period to resolve the situation.
Paragraph 72, on the bridge bank report,
states: “The
Bank must report to the Chancellor about the activities of a bridge
bank if a bridge bank exists for a year. The first report must be made
as soon as is reasonably practicable after the end of one year
beginning with the date of the first transfer to the bridge bank. A
similar report must also be made as soon as is reasonably practicable
after the end of each subsequent
year”. My
understanding is that Northern Rock reports quarterly to the Treasury,
and I am not sure why the reporting requirements for the bridge bank
are less onerous. I thought that they would be broadly
comparable. Paragraph
80, which is on disposal and onward transfer, states:
“Following
this process, the Bank shall complete the transaction. This may be
achieved through a standard commercial agreement...or by
exercising the onward transfer powers provided in the Banking
Bill.” I
do not know whether there is a practical difference between the two
options. Will they be used in different circumstances, or are they
interchangeable? It is not clear why that might be the
case. 6
pm Paragraph
93, on page 16, is also ambiguous as to
time: “If
a bank is likely to remain in public ownership for longer than a short
period”. It
is sometimes difficult to determine what a short period is. There is no
guidance, and the context is the objectives that the Treasury will set
for the board of directors. In the case of Northern Rock, even though
we are in a period of temporary public ownership, that period has been
deemed sufficiently long for the Government to set objectives. The
Government could have argued in February that they expected to make a
quick sale and therefore would not set objectives. That is a purely
hypothetical argument rather than a realistic one, but the presumption
should be that objectives will be set for a bank in temporary public
ownership. Having
read through the code, I have just picked out some areas where further
work needs to be done. I make those points not to sound pedantic or
picky but to say that we need to be much clearer about how the code
will
operate in practice if it is to be the reassurance that the financial
services sector is looking for as to how the powers will be
exercised. To touch on
amendments Nos. 82 to 85 to clause 6, which I tabled, I wanted to focus
on the consultation process surrounding the code. Since I tabled the
amendments, the Minister has tabled a new clause that addresses
amendment No. 83, which would insert after subsection (1)(c) a new line
(d): “‘those
persons whom it considers to have relevant knowledge of those
matters.’.” The
new clause, which is not scheduled for debate today, deals with
amendment No. 83, because it sets out clearly who should be consulted.
In terms of the broader consultation on revisions to the code, the
Government might wish to go wider than that. I have also proposed that
the code should undergo some form of scrutiny. I would not normally
advocate parliamentary scrutiny of a code, but given the importance
invested in this one, Parliament should have the opportunity to
consider it. It forms an important part of the framework of the
Bill. In
conclusion, the code as we saw it on Thursday, which is largely as it
will be when it is made available for public consultation later this
week, requires a lot more work. One or two people to whom I have spoken
who have seen the code share my view that there should be much more
detail about how it will work in practice, and others do not yet see it
as the safeguard that they anticipated. I hope that the Minister will
see my comments as constructive rather than critical for the sake of
being critical. We want to be constructive about how we engage on the
code, but there is a lot more work to be
done.
Mr.
Breed: The proposal relates to an amendment that we tabled
to clause 7. Under clause 5(2)(d) the code will provide guidance
on “how
to determine whether Condition 2 in section 7 is
met”. While
I recognise that we are talking about a draft code of practice, what we
have so far does not really explain precisely how it will be determined
that condition 2 in section 7 is met. It merely repeats some of the
wording from the Bill itself.
A fundamental
aspect of both the amendments to clause 4 and what is happening in
clauses 5, 6 and 7 is how the external investors may view bank shares
or banks in the future. Their investment, which can be considerable,
may be far less certain than they had originally expected. The
determination of whether condition 2 in section 7 is met is
fundamental. We need a clear indication of that in the code because
that sort of clarity, along with the other aspects of amendments that
are yet to come, and one that has already been withdrawn, is
fundamental to the way in which the SRR will work.
Timing is
obviously of the essence. I accept that and it is recognised in the
guidance. But we need to be much more precise about how that condition
is exercised. Upon that will depend so much of the perception of
whether a bank can raise more capital, whether it has enough investors
to begin with and even future capital-raising exercises if necessary.
Unless investors are confident that the plug will not be pulled from a
bank in which they are going to invest and that the conditions will be
clearly met and will not be very subjective in their interpretation,
they will be reluctant to invest in such
businesses. Mr.
Bone: I am trying to follow the hon. Gentleman’s
argument. Is he making the case that where a bank is in some sort of
trouble, but has not reached this stage, investors who might invest in
order to save it will stand back if they do not know the precise terms
of when the special regime will come
in?
Mr.
Breed: That is exactly right. As the Minister said, the
objective is to try to maintain these entities as going concerns. In
general terms that will probably require some sort of recapitalisation
and additional investment. The conditions under which an entity may
ultimately come under some sort of regime may determine whether that
capital-raising exercise is successful. We have to make it much clearer
that it is not too subjective and that clear conditions have to be met,
so that people understand what will happen. As I said, I can see in the
drafts no clear explanation of how it will be determined whether
condition 2 in section 7 is
met.
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