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. 9.30
am 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.
Mr.
Breed: I thank the Minister for his response. During the
debate on the last two or three clauses, I and the hon. Member for
Fareham have pointed out some potential unintended consequences of the
Bill. The principal thrust of the Bill is to protect depositors; it is
obviously designed to prevent runs on individual banks, and that is
absolutely right in today’s situation. In many respects, it is
hard to disagree with the Minister, because if the principal thrust is
to protect depositors we want as much flexibility as possible to enter
into an arrangement to achieve that objective at the most appropriate
time. The hon. Member for Fareham and I were saying that that has
consequences regarding perhaps how capital can be raised—the
cost of that capital—the wider institutional market perception
of the Government’s proposals and how deposit-taking
institutions undertake their business. We do not know the consequences
of course; we are trying to predict them. So often in this place we
rush headlong into legislation, with the right intention—to
achieve a speedy response to an unfortunate event—and then we
live to repent, because of consequences that we had not thought
of. 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. However,
clause 7(6) appears to suggest that the FSA will act within a different
framework of objectives from the Bank and the Treasury. The objective
that will drive
the FSA in that context will be the need to meet conditions 1 and 2, but
it also appears that it will be driven by the objectives set out in the
Financial Services and Markets Act 2000. There is not a complete match
between those two sets of objectives, and after the FSA has pulled the
trigger the Bank of England or the Treasury might decide not to
exercise the stabilisation powers because they do not believe that to
do so would be appropriate in the context of the clause 4
objectives. 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? 9.45
am
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?
Ian
Pearson: As my hon. Friend knows, we have consulted widely
on the Bill. We have talked extensively to the Bank of England and the
FSA, so it is not as if there has not been an enormous amount of
discussion
on how the tripartite authorities will work together. There is consensus
on the legislation that it is an appropriate way forward. In the
evidence-taking sessions that we had at the beginning of the Committee,
there was widespread acceptance, when the FSA and the Bank of England
were asked questions by members of the Committee, that this was a
workable and sensible way forward. We are following that in the
Bill.
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