Banking Bill

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Mr. Hoban: I think that the hon. Member for Northampton, North is alluding to the lack of clarity. The Bill is actually quite straightforward in that it offers the possibility of pulling the trigger and deciding on the stabilisation options. In that respect, there is a clear legal process. However, the implementation of the measure is more sophisticated, because there will be a debate or dialogue between the tripartite authorities about the problem bank. There could be a situation in which the Bank and the Treasury decide that they cannot use the stabilisation powers because they do not think it appropriate. Their conclusions will inform a decision by the FSA to pull the trigger. Effectively, they will have a veto over the trigger, but the Bill suggests that they would not have such a veto. There is a tension between the practical ways in which the powers will be exercised and the legal form. Actually, the practical implementation gives rise to some of the uncertainty and concerns that people have about how the tripartite authorities operate, particularly in the context of a situation such as Northern Rock.
Ian Pearson: I agree with the hon. Gentleman that a clear and sophisticated approach is being adopted to the legislation. Of course, the authorities will work extremely closely together on these matters. As we all appreciate, we are talking about exceptional circumstances. We have experienced such circumstances, and we have the examples of Northern Rock and Bradford & Bingley. We have learned lessons from those and the legislation that we have designed would have been appropriate in those circumstances. It will put a permanent regime in place that gives confidence to the financial markets that there is clarity in our approach. At the same time, our approach recognises that we cannot put the minutiae of future discussions between the three organisations in the Bill.
Sir Peter Viggers (Gosport) (Con): The Minister is seeking to reassure us about the procedures for consultation in relation to the pulling of the trigger—I should certainly like to be reassured on that. The procedure will work only if the Bank is sufficiently tasked and staffed so that it is capable of staying close enough to the situation for the consultation to be worth while. It is no good for the FSA to have the staff or monitoring capacity if the Bank is slightly divorced because it is unable to participate through a lack of resources. Will the Minister reassure us that the Bank will be resourced sufficiently to remain close enough to the situation to be worth consulting over such matters?
Ian Pearson: I agree that the Bank of England needs to be resourced to perform the tasks required of it, particularly the responsibility for financial stability under the powers given to it in the Bill. That is right and proper.
Mr. Hoban: One suggestion made in the context of the code was the need for a decision tree to set out the various steps of the process in order to enable users to understand what happens when and in what circumstances.
Ian Pearson: A non-linear decision tree?
Mr. Hoban: Indeed, that is part of the problem. I tabled my amendment to delete subsection (6) because I interpreted the clause to mean that the general conditions would be exercised very differently from the powers exercised by the FSA under the Financial Services and Markets Act. However, the Minister says that there is a boundary or demarcation line, and that the FSA will consider the threshold conditions in the context of the FSMA and its rulebook. That will be one part of the boundary, and then it will flip over into the powers granted by the Bill to the Bank and the Treasury.
However, that demarcation line does not actually exist. There is no clear line. It is more of an iterative process among the tripartite authorities—I do not think that one can have a circular decision tree—that will affect how the FSA exercises its powers under the FSMA and how the powers in the Bill will work. We are trying through a legal process to impose clarity where clarity does not necessarily exist, and part of the challenge is reassuring people about how the powers will be exercised when that degree of clarity is lacking.
That is part of the Government’s challenge in communicating how the Bill will work in practice. The explanatory notes do not make the process clear, so it is again up to our old friend the code to elaborate on that slightly circular process. We need to work a bit harder on explaining how the initial process will work in practice. However, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 7 ordered to stand part of the Bill.

Clause 8

Specific conditions: private sector purchaser and bridge bank
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I want to make a few brief remarks about clause 8 and to probe the public interest point that the Minister mentioned in our brief discussion on clause 7. The clause sets out the conditions that enable the Bank to use its share transfer or property transfer powers to transfer a bank to a bridge bank or a private sector purchaser. Condition A is that the exercise of the power is necessary having regard to
“the stability of the financial system...the maintenance of public confidence in the stability of the banking system...or the protection of depositors.”
Those three points relate back to the objectives of the special resolution regime in clause 4. I can understand why that is the case. What surprises me about those powers—given the nature of the stabilisation, the share transfer and the property transfer powers—is that they do not have regard to objective 5 in clause 4 (8), which is
“to avoid interfering with property rights in contravention of a Convention right”.
If we are talking about the Bank exercising the stabilisation powers, then it would have to consider objective 5. Will the Minister expand a little on that?
Mr. Peter Bone (Wellingborough) (Con): We are now returning to an earlier argument that we had in which we said that the Government have some super-objectives, and that all the objectives listed in clause 4 do not balance each other. Now we have this clause, which states only three of the objectives rather than the five. Therefore the Government have, in effect, three super-objectives. I do not understand why the Government will not admit to that.
Mr. Hoban: My hon. Friend makes an important point. We debated the priority of the objectives, and we were told that there was no priority. However, we have a situation in which one of the objectives, which is relevant to the powers the Bank can exercise under clause 8, has been excluded. We must consider whether objective 5 in clause 4 has any value both in the Bill and in the context of the share and public transfer rights.
Condition B is phrased rather differently. It comes into play when the Treasury notifies the Bank that
“they have provided financial assistance in respect of a bank”.
Again, we have debated this matter. We have considered what financial assistance means and what types of financial assistance can trigger the special resolution regime. We know that the Government will come forward with secondary legislation on that. Again, we have a situation in which the objectives that condition B relates to are much more limited. Subsection (5) (a) says that
“the Treasury have recommended the Bank of England to exercise the stabilisation power on the grounds that it is necessary to protect the public interest.”
It is not clear whether that is the same public interest that is referred to in subsection (2), which is effectively in the first three options. Subsection (4), however, refers to the financial stability objective. The Treasury, through condition B, recommended that the Bank should exercise its stabilisation powers, but there is no reference to objective 5, which is about property rights. Given that those rights effectively effect a partial transfer, why is objective 5 not listed there? Concerns have been expressed about the impact of such powers on creditor rights. Therefore, it is surprising that objective 5 has not been included in clause 8.
10 am
Condition B can be satisfied only if
“the Treasury have recommended the Bank of England to exercise the stabilisation power”
and if it is the Bank’s opinion that that is the best way to proceed. Will we ever know whether the Bank has turned down the Treasury’s request? Would the Bank ever turn down the Treasury’s request or is it one of those areas where we are back to the non-linear decision tree in which there is a general discussion and all the steps are announced at the same time?
I wonder whether the Minister will take the opportunity to explain which definition of financial stability applies in the clause. We have the broad definition in the code and the one set out in the evidence given to us at the start of Committee by Nigel Jenkinson of the Bank of England and provided in evidence to the Treasury Committee. The Bank’s working definition, supplied to us in the evidence session, is narrower than the definition in the code. I raised that with the Minister on Tuesday, but the question did not get a reply. It will be helpful to understand how the tripartite authorities will reconcile the two definitions of financial stability.
Returning to this slightly non-linear process, I think that clause 8 is subordinate to clause 7, whereas the language in clause 8(6) suggests that it is in addition to it and that the two work together. The provisions in clause 8 can be exercised only if a decision under clause 7 has been reached, but the language in clause 8 does not reflect that.
Ian Pearson: The authorities recognise that the stabilisation powers can alter or remove property rights and involve public authorities taking control of commercial institutions. Therefore, the special resolution regime stabilisation powers should be used only when they are justified in the public interest. To that end, in addition to the general conditions provided in clause 7, the Bill requires further specific conditions to be met before the authorities can deploy particular SRR stabilisation options, and those are set out in clause 8. The clause requires the Bank of England to be satisfied that specific conditions have been met before exercising a stabilisation power to transfer the whole or part of a failing bank to a private sector purchaser or a bridge bank. I draw the attention of the Committee to the structure of the conditions, which require that one of two specific conditions be met before the Bank can act.
Condition A ensures that, before the Bank of England can exercise the powers to transfer a bank to a private sector third party or a bridge bank, it needs to be satisfied that exercising the powers is necessary, having regard to the public interest in the stability of the financial systems of the UK, in the maintenance of public confidence in the stability of the banking systems and in the protection of depositors. Those specific conditions provide a higher test than a public interest test framed in wholly general terms. Effectively, they set out in the Bill those elements of the SRR objectives, which the hon. Member for Fareham noted we discussed under clause 4, to which the Bank of England must have regard before deploying its resolution tools. Before determining that the conditions are met, the Bank of England must consult with both the Treasury and the FSA.
Mr. Bone: Will the hon. Gentleman give way?
Ian Pearson: May I reply to the points raised by the hon. Member for Fareham? I will then happily give way. The hon. Member for Fareham asked why the specific conditions cover all the SRR objectives, but ignore the SRR objective of protecting property rights. The aim of the stabilisation tools is to protect depositors and to maintain financial stability and confidence in the banking system, or to protect public funds if they have been invested in the bank before the SRR powers were exercised. The authorities must have regard to the objective of protecting property rights when exercising the tools, so it is not appropriate for it to be a public interest test that justifies using the tools.
Mr. Bone: Towards the end of his speech the Minister said, “the stability of the financial systems of the UK...and the protection of depositors.” It says in the Bill “or”. If it is “and”, all the conditions will have to be met; if it is “or”, only the protection of depositors. I wonder which it is—the collection of the three or the single one. If it is as it says in the Bill, not as the Minister said, it could be just the protection of depositors, irrespective of the other two conditions.
Ian Pearson: My understanding is that it could specifically refer just to the protection of depositors. It could refer to all three of them but singly would be possible.
Condition B in clause 8 applies to the situation where the Treasury has provided financial assistance to a failing bank
“for the purpose of resolving or reducing a serious threat to the stability of the financial systems”.
In such situations, to protect public funds, the Bill requires the Treasury to lead in judging that a stabilisation power is necessary to protect the public interest but the Bank of England will still lead in deciding that an exercise of a stabilisation tool best protects that public interest. This arrangement ensures that both authorities exercise powers under their mandates.
The hon. Member for Fareham also asked about definitions of financial stability. One definition of financial stability relates specifically to the Bank’s exercise of its powers under the SRR. There is also a wider definition of financial stability. That explains why there are different definitions. It might be helpful if I write to the Committee and explain the difference and the reasons for it.
This is an important clause that ensures that the stabilisation tools are used only when it is necessary to protect financial stability, confidence in the banking system or depositors.
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