Banking Bill

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Mr. Hoban: I do not have much to add to the comments of the hon. Member for South-East Cornwall, who highlighted the challenge posed by the wording of the Bill. It certainly seems that there is a low hurdle for the FSA to jump to trigger the powers. I shall touch on the issue of time scale, which the hon. Gentleman also mentioned. An institution might have a short-term funding problem for a week, but the position might be resolved in a month. What is the time scale for the exercise of the second condition? It is not clear how much leeway the authorities would give a business in that situation. We need to probe that matter. In part, it might be dealt with in a revised code. The hon. Gentleman and I have opted to strengthen the constraints in the Bill, but that might not be the best way, so we need some clarity about when the condition applies. The Bill states:
“Condition 2 is that having regard to timing and other relevant circumstances”.
Clearly timing is a key factor. I am not sure what “other relevant circumstances” those who drafted the Bill have in mind, but we need to understand the context in which the power would be exercised and how the regulator would define “not reasonably likely” in relation to that area.
Ian Pearson: Nobody wants precipitate action taken when a bank gets into difficulties, but I also hope that nobody wants the situation to be left so that it is too late to exercise stabilisation powers in a timely manner. The question is what balance needs to be struck and what judgments need to be made in that area? I fully understand the points made by the hon. Member for South-East Cornwall; he wants to probe us on the conditions and establish whether the bar is being set at the right level. We believe it is and I shall explain why.
Ms Sally Keeble (Northampton, North) (Lab): Can my hon. Friend explain why the FSA should be the one to pull the trigger and how he wants the FSA to operate because there has been failure in the regulatory regime? I want assurances about what the exact expectations and the justifications were.
Ian Pearson: I shall happily cover that point, although the hon. Member for Gosport has raised it and we have discussed it on a number of occasions, including on Second Reading and in debate on other parts of the Bill.
Let me explain why the tests we are putting in place with these two general conditions are the right ones. The purpose of the clause is to make it absolutely clear that the authorities will not—indeed, cannot—use the stabilisation powers until it is clear that a bank is failing and that voluntary or regulatory action is no longer appropriate to resolve the situation. Clause 7 has two conditions that need to be met. The first is that
“the bank is failing, or is likely to fail, to satisfy the threshold conditions”.
The second is that
“having regard to timing and other relevant circumstances it is not reasonably likely that (ignoring the stabilisation powers) action will be taken by or in respect of the bank that will enable the bank to satisfy the threshold conditions.”
That point of “reasonably likely” has been raised by the hon. Member for South-East Cornwall with his amendment and the word “timing” was discussed by the hon. Member for Fareham in his contribution. On timing, it is not appropriate to set in the Bill a future time limit by which the bank has to demonstrate that it is reasonably likely that it can turn the situation around. The two conditions are to ensure that the bank is put into the special resolution regime at the right time. The cumulative effect of both conditions achieves that, as they cover a decision based on, in the first instance, the current situation of the bank regarding quantitative and qualitative conditions, and a decision about whether the future turnaround of the bank is unlikely. Those decisions are designed to ensure that the SRR powers can be exercised before the banks enter insolvency. One reason for that—as we have discussed in relation to other clauses—is to preserve whatever residual value there may be in the failing bank, which is a point that the hon. Member for South-East Cornwall made strongly on Tuesday. Acting at that time increases the chance of a private sector solution or a swift resolution through a bridge bank. Given that fact, the reasonable likelihood for the second test provides the right level of assurance for stakeholders that voluntary or regulatory action will no longer work, while increasing the prospect of a successful resolution.
The use of any of the stabilisation options also includes a strong public interest test which we will debate in clause 8. As Lord Turner recently said to the Treasury Committee, things can move very quickly when a bank is in a failing situation. These are matters of judgment, but I do not think that the amendment proposed by the hon. Member for South-East Cornwall would help. We believe that the two conditions set the bar at the appropriate level.
My hon. Friend the Member for Northampton, North asked the familiar question about why the FSA should pull the trigger rather than the Bank of England. We believe that the FSA, as the regulator of firms, should be the lead authority in deciding when a bank is failing. That position was supported by respondents to the January and July consultations. Giving the trigger to another institution would be likely to lead to dual regulation of financial firms, which would be wasteful and costly. Obviously—I have made this point on a number of occasions—at such a time the tripartite authorities would be in close contact, as they are now.
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If the hon. Gentleman feels that he has to press the amendment, I will encourage the Committee to oppose it. We believe that the test of reasonable likelihood—the two conditions in clause 7 and the public interest safeguards in clause 8—sets the right level, but I appreciate the probing way in which he has pursued the amendment.
I shall not press the amendment because the matter has been well highlighted and ventilated in the Committee. However, I urge the Minister and the Treasury officials to think about the consequences that may unwittingly be brought about because of the fundamental desire to protect in all possible circumstances the interests of depositors. There are other interests that sometimes need to be balanced.
It is difficult to argue against what has been said on the main thrust of the Bill. We were probing the Minister, and also pointing out that there might be unintended consequences and that those might not be in the greatest interest of the UK economy and the banking network as a whole. That is the danger. On that basis, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Hoban: I beg to move amendment No. 86, in clause 7, page 4, line 38, leave out subsection (6).
I want to probe how the special resolution objectives that were set out in clause 4 interact with the power to pull the trigger. We will look at the interaction between the objectives and other parts of the legislation under clauses 8 and 9.
It would be helpful to think about how the sequence of events is covered. Clause 7 gives the FSA the power to pull the trigger, which will determine whether the Bank or Treasury can exercise the stabilisation powers referred to in clause 1(4).
The Bill presents that as a linear process. The first step is either that the FSA will determine that the Bank, under clause 8, may exercise the stabilisation powers to enable it to sell a bank to a private sector purchaser or transfer it to a bridge bank, or that the Treasury will put the bank in temporary public ownership. The second step, if no financial assistance is given, is that the Bank of England will decide whether it should transfer the bank to a bridge bank or a private sector owner. The FSA, having said that the trigger can be pulled, may delegate the responsibility for what powers and options are used when no financial assistance is given. If financial assistance has been given, either the Treasury can take the bank into temporary public ownership, or the Bank can use the stabilisation powers to transfer the bank to a bridge bank or a private sector provider.
The FSA might pull the trigger, and the Bank and the Treasury could say, “No, we will not bother doing that because we do not think that we can achieve our objectives after you pulled the trigger.” So what happens then? That might be part of the problem about the sequence of events, but I am not sure that the process is as linear as the Bill suggests. The Minister has said that the tripartite authorities will discuss resetting all those things, but will they get to the point of saying together that they would pull the trigger and take action so that the decisions are made virtually at the same time? That way, the FSA would in effect only pull the trigger if it believed that the Bank or the Treasury would use their stabilisation powers.
It is worth pointing out that subsection (4) relates to our old friend financial assistance. Given the debate we had on Tuesday about financial assistance, it would be helpful to understand what sort of financial assistance the Government envisaged in the context of the FSA being able to pull the trigger. It would be helpful if the Minister expanded on how the FSA’s objectives under the Financial Services and Markets Act interact with the objectives under clause 4 and how the decision-making process will work in practice, as opposed to how it appears to work legally.
Ian Pearson: The amendment looks at the FSA’s decision on whether the general conditions are met and proposes that that should be subject to the SRR objectives, and I would like to explain why I do not agree with that. A fundamental distinction needs to be made between whether the SRR should apply and what actions should be taken. Deciding whether the general conditions are met is an exercise in determining whether the SRR should apply, not what actions should be taken in pursuance of it.
The SRR objectives are relevant to what actions should be taken, and they stipulate them clearly, but they should not condition whether it is appropriate for the SRR to apply to a bank in the first place. The general conditions relate specifically to regulatory and voluntary action outside the SRR rather than action under it. That is important in providing confidence to stakeholders and the market that stabilisation powers cannot be exercised before other, non-SRR options are deemed not appropriate. That was the point made by the hon. Member for South-East Cornwall. It is right to consider what steps can be taken before the trigger is pulled and stabilisation options are considered.
The general conditions in clause 7 are linked to the threshold conditions set out in the Financial Services and Markets Act 2000. Therefore, in exercising such decisions, the FSA will be acting according to its objectives and principles under the Act. That is the point referred to by the hon. Member for Fareham, and it is absolutely right that that should be the case. In deciding whether the general conditions in clause 7 are met, the FSA would have regard to the rules and guidance in the threshold conditions section of the FSA handbook, which has regard to the statutory objectives set out in the FSMA.
The conditions have been designed to give the market confidence that regulatory and voluntary options have been explored before a bank is put into the SRR. Given that, to impose a different set of objectives over and above the principles and objectives that guide the FSA’s decisions under the FSMA would provide confusing and possibly conflicting guidance to the FSA in exercising its discretion. There is clearly a distinction to be made between the actions taken under the SRR and whether the SRR should apply, which will depend on the conditions being met and the FSA’s exercising its decision-making power in accordance with the rules and guidance in the threshold conditions in its handbook.
For those reasons, I hope that the hon. Member for Fareham will feel able to withdraw his amendment. He raised an interesting point about whether the FSA would pull the trigger if the Bank did not want to act. As I have explained on a number of occasions, the decision to pull the trigger is taken by the FSA, but it will be taken after close consultation with the Bank of England and the Treasury. As various consultations have made clear, it is not a linear process. Very few things in real life are; I think that Einstein said that even a straight line was not necessarily linear. Authorities would consult each other on all decisions, as is set out in the Bill. In practice, the intention would be that the decisions would all be taken and announced together.
Ms Keeble: The clause goes to the heart of some of the problems that we saw in the Northern Rock debacle. My hon. Friend has described how he thinks the procedure will work in practice. How much scenario planning—war games or whatever—has there been or will there be to test how the procedures would work in practice?
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Ian Pearson: We can probably say that the relationship between the Bank of England, the FSA and the Treasury has been forged in battle over recent months. Extensive and close consultations have been held. I do not think that circumstances could arise in which the FSA would pull the trigger without knowing what the Bank or the Treasury was going to do. There is close co-operation, and I do not doubt that it will continue.
Ms Keeble: The issue about the working of the tripartite authorities is critical, and Opposition Members and some Labour Members have been critical of it. The mechanism was supposed to resolve some of the difficulties that arose last time. Will the Minister be clearer and say exactly what steps have been taken to check or work through how the mechanisms would resolve some of the current difficulties, and how they would operate in practice?
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