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Banking Bill

Banking Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Jim Hood, † Mr. Eric Illsley
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Eagle, Angela (Exchequer Secretary to the Treasury)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Keeble, Ms Sally (Northampton, North) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Smith, Geraldine (Morecambe and Lunesdale) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Viggers, Sir Peter (Gosport) (Con)
Wilson, Phil (Sedgefield) (Lab)
Alan Sandall, Mick Hillyard, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 6 November 2008


[Mr. Eric Illsley in the Chair]

Banking Bill

Clause 5

Code of practice
Amendment proposed [4 November]: 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,’.—[Mr. Hoban.]
9 am
Question again proposed, That the amendment be made.
The Chairman: I remind the Committee that with this we are taking 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. Mark Hoban (Fareham) (Con): I welcome you to the Chair, Mr. Illsley, for today’s proceedings.
We had quite a full debate on this group on Tuesday afternoon and I want to reflect a little on the Minister’s response to it. Before I do so, I should like to refer to the comments that my hon. Friend the Member for Gosport made about who should pull the trigger. He made them in the context of the debate about the code and we will pick up on that in clause 7. My hon. Friend and I share the same viewpoint on this. For a variety of reasons we believe that the best body to pull the trigger is not the Financial Services Authority but the Bank of England.
My hon. Friend gave a clear elucidation of those reasons on Tuesday. If we concentrate on the efficiency of the regulatory system, there is a danger that we forget about its effectiveness. The responsibilities of the tripartite authorities are so clearly delineated in each other’s minds that sometimes there is no overlap or any form of check or scrutiny or engagement in other aspects of their arrangements. That is why giving the Bank of England the power to pull the trigger will give it a much greater role in the supervision of the banking system.
We need to get the balance right. We do not want to have two regulators, but we need to ensure that there is an effective check and there is no risk of regulatory forbearance by one regulator. My party’s policy is that the Bank of England should pull the trigger but, as the Minister knows, in the interests of passing the Bill speedily, my right hon. Friend the Member for Witney (Mr. Cameron) indicated that we would not be pursuing this matter now. We will leave this one for another time. It is very much on our agenda to look at this.
I want to go back to the Minister’s remarks on Tuesday afternoon and to focus on two points. The first is about flexibility. We appreciate the need for flexibility in the code and the way in which the powers are operated. The Minister talked about flexibility in the context of making a statement on the use of powers and my amendment on “comply or explain”. I understand the point he makes, but there is a risk attached to flexibility that we need to bear in mind. The code is being put out to consultation today and will be redrafted. If it is too vague or opaque, or the need to comply with it is too lax, it will undermine confidence in the way in which it is meant to circumscribe the exercise of powers in the Bill. I will come back to the comments made by the hon. Member for South-East Cornwall about the benefits of that circumscription.
The second point is on the threshold conditions. The Minister indicated that the FSA, in the light of the Bill, will look again at the threshold conditions to ensure that the two things dovetail. When will the FSA consult on a revision of the threshold conditions? Will there be fewer conditions? I mentioned a couple of the conditions on Tuesday. Will the adequate resources condition be the key condition in the context of the Bill, and how much guidance will the FSA give on the conditions? One concern is that too much opacity on how the conditions can be met or, indeed, breached, will undermine confidence in the use of powers in the Bill.
I should like to go back to the central purpose of having the code in the Bill and why the code is important. The Bill includes some quite invasive powers: it gives the tripartite authorities powers to interfere with the rights that creditors and investors would normally enjoy. For example, it gives the tripartite authorities the right to take control of the bank and to transfer part of its assets into a bridge bank. The code is meant to provide confidence to creditors and investors about how the powers will be exercised. Increased uncertainty about that means that there is high risk in the eyes of investors and creditors. Higher risk means an increase in the cost of capital, which will make it harder for banks to raise capital, which will have an impact on the wider economy. If the cost of capital of a bank increases, so will the cost of the loans it makes to households and families.
I believe that the Government recognise that, which is why they have accepted that it is important that the code sets out the limitations on the exercise of powers in the Bill. However, to give confidence to the sector, the code needs to be explicit about the circumstances in which, and when, the powers will be exercised. The Government must therefore produce a much more detailed code if they are to allay any fears about the use of the powers. They need to provide clear guidance to the tripartite authorities rather than produce a rewrite of the explanatory notes, and to set out, in the context of clauses 10, 11 and 12, the hierarchy of the stabilisation options, and what is the preferred option.
Not only the code but the threshold conditions need to be more specific to avoid the sense that they can be used in an arbitrary fashion. The Government will argue that they need flexibility; that an overly restrictive code will constrain the freedom of action. However, if the use of invasive powers in the Bill is perceived to be unconstrained, markets will make their own judgments on whether they should invest in British banks. If the code as redrafted does not provide significantly greater detail on how and when the powers will be used, there will be demand for the constraints to be in the Bill rather than the code.
The Government need to reflect on the tension between flexibility and reassurance. At the moment, the code errs on the side of flexibility. If that continues, the cost of capital will rise, and families will pay the price through higher interest rates. Moving forward, the Government need to think carefully about how the code should be redrafted to give confidence to banks and their investors and creditors. Certainly, conversations that I have had in the past few days with external parties suggest that the code as currently drafted does not do the job that people expected it to do.
The Economic Secretary to the Treasury (Ian Pearson): It is a pleasure to welcome you to the Chair for this sitting, Mr. Illsley. I spoke at some length on the proposed amendments to clauses 5 and 6 on Tuesday afternoon, and I do not intend to do so today.
I should like to say two things in response to the hon. Gentleman, the first of which is on his point about the FSA and the need to explain the situation. The FSA is looking at the guidance on threshold conditions, not the conditions themselves, and plans to consult on it in December. However, as I made clear earlier, I can confirm that adequate resources and management suitability are key conditions for assessment of the trigger.
There are always decisions about what to put in primary legislation and what is more naturally secondary legislation or required in codes of practice. Those decisions are fairly straightforward in many instances, but in others they are matters of judgment, with fine distinctions. We always have debates about those issues.
I welcome the hon. Gentleman’s general support for the Bill and I note his comments on the code. As he says, we are consulting on it, starting today, and also consulting on the secondary legislation. We have been working closely with the expert liaison group and others to ensure that we get the details of the secondary legislation right. I do not think that there are any differences on intention or principle other than on who exercises the trigger. There is genuine willingness on both sides of the Committee to have legislation and a code of practice that does the job that we all want it to do. With those brief comments, I hope that we can move on.
Mr. Hoban: I welcome the Minister’s remarks. It will be important for the Bill’s progress through the other place, where their lordships will be looking carefully at the revised code and how it interacts with the powers, to get the balance right. My main concern is that the balance between the constraints, which the code imposes on the exercise of powers, is not right. I recognise the tension between primary and secondary legislation and the code. I, and others, would be more comfortable, if the code was beefed up, but people will make their views known clearly through the consultation process. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: No. 89, in clause 5, page 3, line 39, leave out paragraph (f).—[Ian Pearson]
Clause 5, as amended, ordered to stand part of the Bill.
Clause 6 ordered to stand part of the Bill.

Clause 7

General conditions
Mr. Colin Breed (South-East Cornwall) (LD): I beg to move amendment No. 75, in clause 7, page 4, line 27, leave out ‘not reasonably likely’ and insert ‘highly unlikely’.
I, too, welcome you to the Chair, Mr. Illsley. The amendment is also in the name of the hon. Member for Fareham, who will no doubt want to say a few words. The clause, which covers general conditions, is another important part of the Bill. The amendment is in tune with some of the previous amendments discussed, which concern how and when the powers, and the stabilisation powers in particular, are used, and their effect on the enterprise that they are used upon. On the face of it, the amendment may seem semantic, in that we are seeking to delete the words “not reasonably likely” and replace them with “highly unlikely”. In the Bill, we are attempting to consider not just current conditions but conditions in the future when this legislation may be used in different circumstances. Hopefully, it will not be used in a general sense, but in the specific case of a particular banking operation. The amendment refers to the timing of the use of such powers, which is crucial.
9.15 am
Our proposed regime should be invoked only when it is clear that all other possibilities for retrieving the situation in which the bank finds itself have been properly explored. Moreover, the board and the advisers must have made every effort to prevent the failure and have been given the necessary period of time to pursue such opportunities. In fact, everything possible must have been done and must have failed before the regime can be invoked. In such a situation, it is not just “reasonably likely” but highly unlikely that they will meet those threshold conditions.
As I said earlier, such a measure is all about timing. If at all possible, we should try to maintain the integrity of the whole business. We should consider the value of that business and the opportunity for it to continue. We should not take precipitate action that would jeopardise that possibility.
Leaving action too late could jeopardise the possibilities for protecting the depositors, which is the principal thrust of the Bill. None the less, exercising those powers too early could jeopardise the interests of other stakeholders in the business, so the timing is critical. Just as we discussed the opportunity of exercising the powers in a flexible way, so, too, the authorities will want as much flexibility as possible in determining exactly when they introduce the powers.
The amendment is designed to raise the bar to protect, to a certain extent, the bank and its directors in their efforts to maintain the enterprise. We do not want action to be taken too early in the interests of depositors without necessarily taking into account the interests of other stakeholders. We are talking about pre-solvency situations. The enterprise at that stage may be solvent, but it may not reach the threshold conditions. There is a period of time in which there are opportunities to save it.
The Government should seriously consider the amendment, particularly in light of the remarks made by the hon. Member for Fareham during our debate on the last clause. The amendment will provide some measure of confidence to those who are being asked to invest substantial sums in the banks. It is likely that part of any operation to try to meet the threshold conditions will inevitably involve recapitalisation or the raising of additional capital. Going out to seek fresh capital when there is a possibility that the trigger will be pulled because it is “not reasonably likely” that the bank will meet the threshold conditions is a whole lot different from going cap in hand with a clear indication that it is highly unlikely that the trigger will be pulled. To a certain extent, it will give a view on whether a capital-raising exercise is a possibility. It may even jeopardise the capital-raising exercise, thus defeating the whole purpose of trying to maintain the entity as a whole.
Although, it may seem merely semantic to change the words, they are highly significant. If we are moving the bar, or having the bar set at such a low level as “not reasonably likely”, it will affect the efforts of any bank under threat of not being able to meet its threshold conditions to retrieve the situation. An awful lot of things may not be reasonably likely at any one stage, but that does not mean that they will not happen. Efforts can be made and negotiations can be undertaken, but once they have been completed and it becomes clear that any rescue measure seems to be beyond redemption, in that sense, it then, of course, becomes highly unlikely. At that stage, it is inevitable that the threshold conditions will not be met, and the powers can be exercised.
As I have said, we should seriously consider those points because, as we noted when we discussed the last set of amendments, confidence in the marketplace, the cost of capital and the ability to maintain a competitive operation within the general marketplace should not be jeopardised. I have referred to the measure being just for depositors and they are, of course, an important part of the legislation, but so too are other aspects of the whole banking business. That includes those who provide the capital for banks and the way in which banks generally operate in the competitive marketplace. With those factors in the mix, we should be careful before exercising the powers and we should ensure that the conditions to be pursued are set at an appropriate level. The bar should not be set too low. In addition, the authorities should not be brought in too early as that could even be to the jeopardy of depositors—although not necessarily. However, it could certainly be to the jeopardy of other stakeholders.
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Prepared 7 November 2008