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Session 2007 - 08 Publications on the internet General Committee Debates Banking Bill |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks attended the
Committee Public Bill CommitteeThursday 6 November 2008(Morning)[Mr. Eric Illsley in the Chair]Banking BillClause 5Code
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.
We had quite
a full debate on this group on Tuesday afternoon and I want to reflect
a little on the Ministers 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 others 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 partys 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 Ministers 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. Gentlemans 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 Ministers remarks. It will be
important for the Bills 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 7General
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
depositorsalthough not necessarily. However, it could certainly
be to the jeopardy of other
stakeholders.
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©Parliamentary copyright 2008 | Prepared 7 November 2008 |