House of Commons
|Session 2007 - 08|
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General Committee Debates
The Committee consisted of the following Members:
Alan Sandall, Mick Hillyard, Committee Clerks
attended the Committee
Public Bill Committee
Thursday 6 November 2008
[Mr. Eric Illsley in the Chair]
Specific conditions: temporary public ownership
Question proposed [this day], That the clause stand part of the Bill.
Question again proposed.
Mr. Peter Bone (Wellingborough) (Con): That was the longest intervention that I have ever had to deal withit has lasted several hoursbut the hon. Member for South Derbyshire (Mr. Todd) made a good point earlier. I wrote down what he said. It is the reverse of the point that I was making, but it is none the less a point of principle.
The hon. Gentleman said that there was a market solution for HBOS and Lloyds. The competition laws were originally torn up so that there would be a market solution, but since then we have had nationalisation. That is at the heart of the issue.
The Government say that nationalisation is the last resort. However, we have seen with HBOS and Lloyds that it is not the last resort but the favoured resort. We must return to that question on Report, as the Governments assurances and statements do not match the Bills provisions; nor do they match what is happening in practice.
The Economic Secretary to the Treasury (Ian Pearson): I shall make a couple of points in response to the hon. Gentlemans concern about whether temporary public ownership is a measure of last resort. As I indicated earlier, it is not appropriate to use the term last resort in the Bill. However, I believe that the Bill makes it clear that temporary public ownership is a tool of last resort. I shall explain why.
The Bill achieves that purpose by ensuring a higher public interest test for temporary public ownership than for the stabilisation options of transfer to a private sector purchaser or a bridge bank. The hon. Member for Fareham will appreciate that under clause 9 a bank can be taken into temporary public ownership only if there is a serious threat to financial stability or if it is necessary to protect the public interest when financial assistance has been provided to the failing bank to reduce or resolve that threat to financial stability.
Under clause 8, however, a bridge bank or private sector purchase can be exercised if it is necessary to protect financial stability, to protect confidence in the banking systems or to protect depositorsor any combination of the three. Under clause 8, the Bank of
Mr. Mark Hoban (Fareham) (Con): In effect, clause 9 covers a much narrower set of circumstances, with stricter tests. Clause 8 deals with a much wider range of conditions that could be used to justify bridge bank or private sector solutions, whereas clause 9 deals with a narrow and serious threat to financial stability, or financial assistance, and it is that which could trigger temporary public ownership.
Ian Pearson: Bingo! That is exactly the position I was trying to explain. Clause 8 would allow the regime to be exercised on the grounds of needing to protect depositors. We cannot do that under clause 9. We believe that the narrowing demonstrates that temporary public ownership is a last resort. It is clearly not appropriate to put it in the Bill, but that is certainly what is intended.
Question put and agreed to.
Clause 9 ordered to stand part of the Bill.
Private Sector Purchaser
Question proposed, That the clause stand part of the Bill.
Sir Peter Viggers (Gosport) (Con): I am not sure whether there is a mistake in the clause, but I should like clarification. The heading of the clause is Private Sector Purchaser, yet subsection (1) refers to a commercial purchaser. I would like to know the difference. A private sector purchaser is clearly one who is not in the public sector. That is the only definition. The word commercial must refer to a body involved in commerce, which could include a state. State enterprises could thus be involved if there was a commercial solution and that, of course, would include sovereign funds. Is there meant to be a distinction between private sector and commercial? My understanding of law is that the text in a Bill takes precedence over the clause heading, so are we talking about a commercial solution that could involve sovereign funds and enterprises owned by other states?
Ian Pearson: Clause 10 establishes that where the general special resolution regime conditionsas set out in clause 7and the specific conditions for the private sector purchaser stabilisation option of clause 8 are met, the Bank of England may effect a sale of all or part of the business of a bank to a commercial purchaser. The Bank is already responsible for important aspects of financial stability and the Bill provides for the responsibilities to be formalised, including through the addition of a statutory financial stability objective, as previously discussed in our debate on clause 216.
Given those responsibilities, the Bank should have the tools available to resolve a bank in the interests of financial stability, so the Government are making the Bank of England the UKs lead resolution authority, conferring on it powers to effect the key stabilisation optionsthe private purchaser tool we are talking about and the bridge bank tool. Stakeholders and the Treasury Committee have supported the proposal.
The means to transfer the ownership and business of deposit takers already exists but commercial transfer mechanisms are not appropriate for dealing with failing banks. They are often too slow and do not provide sufficient certainty for parties involved in the transaction. The same is true of the part 7 procedure in the Financial Services and Markets Act 2000. The private sector purchaser tool in the clause provides for swift and certain transfer of some or all of the banking business from a failing bank to a private sector purchaser. The resolution of a failing bank by way of a transfer to a private sector purchaser is a highly desirable outcome and would generally be the Governments favoured option, as I hope I have made clear.
A private sector solution is likely in many circumstances to be the resolution option that best meets the special resolution objectives. The transfer may be effected either through the transfer of a banks shares or other securities, or its property, rights and liabilities. Having both options provides enhanced flexibility. Property transfer powers also enable the Bank of England to choose which parts of a failing banks business to transfer. The facility for partial property transfers provides further flexibility to the Bank of England, increasing the chance of a private sector salean important point.
The hon. Member for Gosport is correct to note that the clause text has primacy. The heading is intended to give an indication of the intention. The phrasing in the clause is drawn widely to ensure that a range of transfers is possible, subject to meeting the public interest.
Question put and agreed to.
Clause 10 ordered to stand part of the Bill.
Question proposed, That the clause stand part of the Bill.
Mr. Hoban: The clause deals with the bridge bank option, which is the least familiar to the Committee. We all know what temporary public ownership is, and we all know about the private sector. I want to speak about some of the tensions that there might be in running a bridge bank. We touched on them briefly when dealing with the code. The arrangements generated a reasonable amount of comment during the consultation process, but there is concern about how a bridge bank might operate in practice.
In response to the July consultation, the British Bankers Association said:
Under the bridge bank model the Bank of England would play a key role in setting strategic objectives and overseeing the management. Inevitably having the central bank involved in matters of commercial positioning, possibly with the bank also receiving public financial support, could raise competition policy issues.
The code suggests that the Bank would be run on a conservative basis.
The City of London Law Society, in its response, said:
We would...welcome further clarification regarding what a bridge bank would be able to do in terms of banking functions. Is it envisaged that it will be able to accept new deposits or to accept new business? There is a real risk that allowing it to carry out traditional banking activities could distort the inter-bank market.
Not LIBOR in that context, but competition between banks. The society noted that it could be arguedas we did earlier this year in the context of Northern Rockthat
because of the bridge banks healthy and attractive balance sheet and because it is in effect supported by the Authorities, there is the chance that it will have a competitive edge over other banks.
In terms of running a bank on a conservative basisI use the language of the codeto what extent will a bridge bank be able to carry out the normal activities of a bank? Will it be open to accepting new business? Will it be open to innovative competition with other banks?
One objective of the bridge bank is to try to facilitate a private sector purchase. It would clearly need to maintain the franchise value of the failing bank. Would that be maintained if the bank is run in a conservative fashion, or would it always be at the bottom end of the market? If so, that position could stifle it over time and limit its ability to grow. In the long term, it could reduce its franchise value, although that depends on how long it remains as a bridge bank. These issues would not necessarily be relevant if it was a bridge bank for only a month, but the rules for the reports that the bank would need to make allow for the possibility of the bridge bank lasting for more than a year. I would like a better understanding of the constraints under which a bridge bank would function.
Another aspect is who would run the bridge bank. The Bank of England is in charge of appointing a new board of directors, subject to the approval of the Financial Services Authority. The City of London Law Society said in its representation:
The directors may be selected by the Bank of England from amongst the existing directors of the failing bank... but there is clearly a question as to whether such directors would be willing to take on the corporate governance of the bridge bank...to whom would they owe their duty of carethe Authorities or the failing banks creditors?
The code says that the bridge banks board may or may not include employees of the bank, and that it will be decided case by case. However, according to the July consultation on the special resolution regime, the Bank of England is expected to weed out from the board of the failing bank the directors who contributed to its downfall. The example of Northern Rock may be instructive. The chief executive and the chairman resigned fairly quickly and new senior directors were appointed, but not all the executive members of the board of Northern Rock were replaced.
The third element to pick up on is how the bridge bank will be run at arms length from the Bank of England. Arms length is defined by the code as
leaving day to day management of the bridge bank to its board of directors and keeping shareholder involvement at a strategic level.
It later states that
the Bank shall work with the board of directors to decide upon how the bridge bank should be operated... where appropriate the board shall produce a business plan setting out how the directors intend to operate the bridge bank in a manner pursuant to meeting the objectives.
If the primary objective is to sell the bank on, how will that be reconciled with the challenge of the competitive issues? The arms length relationship the bank will have with the directors as the sole shareholder is the right
The second stabilisation option is to transfer all or part of the business of the bank to a company.
I want to talk briefly about partial transfers. In our evidence sessions concerns were expressed about that remedy. Angela Knight was particularly vocal. Responding to a question from the hon. Member for Gosport, she said that
we would like to see an entire bank move... Partial transfers come rather a long way down the list. Our preference would be not to have a partial transfer unless there has been a default. If it is the decision of Parliament that a partial transfer must remain as part of the SRR tools before a default is triggered, it is absolutely essential that the creditors rights are not reordered, that the netting is properly taken care of and that the decisions taken at the time cannot be retrospectively changed by clause 65.[Official Report, Banking Public Bill Committee, 21 October 2008; c. 48, Q136.]
She was a particularly eloquent witness. She gave some reasons for her stance and her distaste for a partial transfer earlier in the proceedings in answer to a question from the hon. Member for Fareham. [Interruption.] I am sorry. My phone is ringing. It is not a call from the British Banking Association, although one would have been helpful.
Angela Knight told the Committee that
other peoples intervention regimes do not interfere with creditors rights, and netting agreements are preserved so that there is not the problem of not being able to net off your capital. Certainly, we have been told by a number of our members that if they could not net off, they would no longer be able to do that business here in the UK, so we would see a commensurate loss of a significant amount of business out of London.[Official Report, Banking Public Bill Committee, 21 October 2008; c. 38, Q109.]
The allegation is that there is a possibility on the horizon that fewer people will engage in banking activities in the City of London or in the UK.
I reiterate those concerns because they were legitimately brought up by the British Banking Association in a particularly eloquent and telling way. It may be that the concerns the association is voicing are well addressed by subsection 3, which provides for a code of practice that may allay the associations concerns about what might be regarded as an unfair or improper partial transfer. We can return to the debate about toxic and non-toxic assets and how we treat them differently, but the Minister has heard the concerns of the BBA. Has he had time to consider and respond to them? The concern is primarily about the first sentence of the clause; the association has a distaste for partial transfers because it thinks that
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