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.
As a final
word on the matter, because we are treading on the ground of a stand
part debate, I want to make it clear that we are not designing a
zero-failure regime.
There might well be circumstances—who is to say?—in which
the Bank or Treasury decide not to use a stabilisation power where the
threshold conditions have been triggered. In those circumstances, the
bank might go into a normal insolvency, but it might also go into the
bank insolvency procedure detailed in the Bill to ensure fast payout
through the Financial Services Compensation Scheme. It is not a
zero-failure regime, but we believe that the lead responsibilities
among the different parts of the tripartite arrangement that makes up
the authorities are the right lead responsibilities. Of course they
will work together closely. That is the normal and expected way of
things. 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
8Specific
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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