Banking Bill

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Ian Pearson: I understand the concerns of the British Bankers Association on that matter, and my officials have had extensive discussions with its representatives. It is represented on the expert liaison group, whose views we have been listening to intently. It is fair to say that partial transfers are the most contentious part of the special resolution regime. We are keen to ensure that creditors are no worse off in the case of partial transfers, which is one of the reasons why we inserted clauses in the Bill that will enable us, through secondary legislation, to provide strong safeguards.
As I have explained, we are consulting on both the code and some of the legislation on safeguards for partial property transfers. If I may engage in a little publicity, the document “Special resolution regime: safeguards for partial property transfers” is available today at the very reasonable price of £14.35, but it is free to members of the Committee, who I am sure would like to take one from the brown box in the Committee Room. The document answers several of the points that the hon. Member for Southport raised because it specifically covers set off and netting arrangements, security interests, structured finance and third-party compensation. It includes consultation on the code, which the hon. Member for Fareham also talked about on several occasions. We are keen to see comments on the code from outside.
Mr. David Gauke (South-West Hertfordshire) (Con): We will have a greater opportunity to debate those matters when we get to clause 43 and, to some extent, clause 42. Is the Minister saying that the safeguards will be included in the secondary legislation or in the code of practice? Presumably there will be a combination of the two, but can he give us some guidelines on what the balance will be?
Ian Pearson: The stakeholders we consulted this year have been very much of the view that they want the safeguards in secondary legislation, rather than in the code. We have taken that to heart, which is why we have produced the consultation document. It is right that those safeguards are enshrined in secondary legislation. When the hon. Member for Fareham has had an opportunity to look at what we are proposing, he might start to take a different view of the code than that expressed in his previous comments. Rather than putting the safeguards in the code, it is right that they should be enshrined in secondary legislation and that Parliament should have an opportunity to debate them. We have tried, as far as possible, to reflect the views of stakeholders in the secondary legislation.
The hon. Member for Fareham rightly said that it is easy to recognise what temporary public ownership or a private sector purchase are, but that a bridge bank is slightly different and might appear strange to people from outside looking at our deliberations, so I shall explain in a little more detail what the bridge bank option will do. In essence, the bridge bank option will give the Bank of England the opportunity to stabilise a bank, preserve franchise value and ensure that consumers have continued access to banking services. It will provide the Bank with time to pursue a private sector solution where that could not otherwise have been arranged immediately by allowing, for example, potential acquirers the necessary time to carry out essential due diligence on the business.
The bridge bank option is important, as it enhances the possibility that the authorities can facilitate the onward sale of the bank to a private sector purchaser, which, as I have said, is the Government’s favoured option for bank resolution. I understand the views that Angela Knight from the British Bankers Association has expressed. In response to the hon. Member for Southport, the BBA and the Building Societies Association recognise the potential utility of the bridge bank as a tool, but they have concerns about the safeguard provisions and the situation of creditors, which we are trying to address.
Of course, it is important that bridge banks be managed in the right way. The hon. Member for Fareham raised issues about what we mean by management on a conservative basis. It is appropriate to set out how that will work in practice in greater detail and, to that end, the code of practice, which the Committee considered on clause 5 and which is available for consultation, makes illustrative provision.
It may be helpful to put on record the fact that the Bank of England will not profit from operating a bridge bank. The compensation provisions, which will be discussed in detail in due course, provide that a bank resolution fund must be established when a bridge bank is created. The fund provides the failing bank with a contingent economic interest in the resolution. The bank resolution fund is a scheme under which the failing bank becomes entitled to the proceeds from the sale of some or all of a bridge bank’s business, less any deductions necessary to reflect the use of public funds in the resolution, including the placing of public funds at contingent risk, or any other costs of the resolution. On the winding-up of the failing bank, the net proceeds of the resolution will flow to the creditors and, should creditor claims be satisfied in full, the shareholders of the failing bank.
Sir Peter Viggers: I am listening carefully to the Minister. He said that the entitlement would be minus any amount reflecting the net cost. Is he referring to the Treasury and Bank of England costs of administering the bank? There must be management and administrative costs involved. I imagine that most costs would be ring-fenced within the bank, but there must be costs of administering the entity at the centre. How will the costing be done and how will the Government, through their various manifestations, charge for management?
Ian Pearson: My understanding of the legislation is that the Bank of England, which will be pursuing the stabilisation option, can retrieve its costs from the bridge bank. I am not aware that there are likely to be substantial Treasury costs involved, but if I have information about that, I will get back to the hon. Gentleman.
Let me take up the other points raised in the debate about the bridge bank being managed on a conservative basis. The bridge bank will carry out the banking business transferred to it, which is likely to be predominantly deposit taking. It could take on new business, but it is not at all intended that it compete aggressively in the marketplace. Our intention is to return a bridge bank to the private sector swiftly, if that is consistent with the special resolution objective and meanwhile operate the bridge bank conservatively.
I do not believe that the bridge bank would have an unfair advantage over private sector banks or that it would distort competition. It would be inappropriate for a bridge bank to compete unfairly on the back of public sector support and we do not intend that to happen. EU state aid rules and other relevant competition rules would prohibit it in any case.
1.30 pm
In conclusion, I believe that having the provisions as a tool will be an important part of what we need to put in place for the future. It would not be sufficient to have only the ability to take a bank into temporary public ownership or to transfer it to a private sector purchaser. This is an essential tool but, as with all these tools, we hope it will not have to be used. Given the circumstances in respect of bridge banks and the issue of partial transfers, it is right that we consult widely with the industry about the potential ramifications and that we take due consideration of the views expressed to us in response, which the hon. Members for Southport and for Fareham have already mentioned. I am confident that as a result of that consultation we can produce secondary legislation that will give safeguards on partial property transfers. Our early discussions with the industry have been positive.
Question put and agreed to.
Clause 11 ordered to stand part of the Bill.

Clause 12

Temporary Public Ownership
Ian Pearson: I beg to move amendment No. 90, in clause 12, page 7, leave out line 4.
The Chairman: With this it will be convenient to discuss Government amendment No. 91.
Ian Pearson: These minor amendments are technical clarifications to the code of practice provisions in relation to banks and temporary public ownership. Amendment No. 90 removes the requirement for the code of practice to make provision about the content of share transfer orders. Every share transfer order will be different, as determined by the particular bank in question. As such, it is not appropriate for the code of practice to attempt to describe in detail the content of such orders.
Amendment No. 91 clarifies the code of practice provisions in relation to banks in temporary public ownership. As currently drafted, the code would have to make provision about the management of transferees. However, the code should not provide guidance on the management of the owner of the bank in temporary public ownership, that is the company fully owned by the Treasury or a nominee of the Treasury. Rather the code needs to make provision about the management of the bank itself.
Amendment agreed to.
Amendment made: No. 91, in clause 12, page 7, line 5, leave out ‘transferees under share transfer orders’ and insert
‘banks taken into temporary public ownership under this section’.—[Ian Pearson.]
Clause 12, as amended, ordered to stand part of the Bill.
Clauses 13 to 15 ordered to stand part of the Bill.

Clause 16

Mr. Bone: I beg to move amendment No. 113, in clause 16, page 8, line 10, at end insert—
‘(3A) Subsection (3) has effect notwithstanding any provision in European Union law.’.
The Chairman: With this it will be convenient to discuss amendment No. 114, in clause 31, page 14, line 7, at end insert—
‘(3A) Subsection (3) has effect notwithstanding any provision in European Union law.’.
Mr. Bone: I tabled these two amendments to help the Government. I hope that when I have explained them they will be accepted, or at least the Government will think about them and come back on Report.
We are talking about a Bill and provisions that we hope never to see in force. If we had been talking five years ago about banks collapsing and the need to make provisions for them, people would have laughed—it just does not happen. It happened a hundred years ago. So, it may be that all our deliberations are for nothing. The Act may never come into force. The Minister has said on many occasions that it will only be called on in exceptional circumstances. I agree with that, but he has also gone on to say on a number of occasions that we want clarity and speed. If there is a failing financial system, speed is needed to deal with the outcome. The Bill seeks to ensure that the effect of transferring shares—or of transferring property, which my other amendment refers to—can happen straight away, without interference. It is clear that that is the intention of clauses 16 and 31. The transfers will have effect whatever any legislation says, so any contract law or other legislation will be ripped up to allow for these special, unusual provisions—temporary ownership of a bank, for example.
The problem is that the Single European Act overrides, or at least the Government believe that it overrides, existing UK legislation. We could find ourselves in the kind of situation that I think has already come about in the current financial debacle, in relation to Northern Rock. The Northern Rock provisions were delayed because the Government had to get clearance from the EU that there was not a problem with state aid. That clearance was negotiated and achieved, but it took time. If the special provisions in the Bill ever needed to be used, speed would be required. The whole Bill is designed for speed. There can be partial ownership, a sale to a private sector purchaser or nationalisation. What we cannot have is the European Union saying, “Hang on a minute; you can’t do that. You are in breach of EU law.” Worse still would be the EU not making that decision and not saying anything, leaving us in limbo. It would say, “You might be in breach of EU law, so you can’t do it,” and meanwhile the whole of our financial system would collapse. That cannot be allowed. The Government will possibly put two fingers up to the EU and do it anyway, but we do not want to be in that situation. The Government have made it clear that their intention, despite what the EU says, is that this will happen. That is what I assume; if the Minister says that that is not the case, we have a serious problem.
The Minister might be minded to say to me, “You can’t do this. You can’t add that amendment because it is not legal.” I am afraid that I am not a lawyer, and I apologise for any mistakes that I might make in the pronunciation of some of the cases that I will mention. The Minister might refer to the Factortame case, which relates to the Merchant Shipping Act 1988. The European Court of Justice—the Luxembourg-based judges who extend our law, almost behind our backs—ruled that that Act was illegal. The matter went to the House of Lords, where it was decided that the European Union Act is incorporated into British parliamentary law. That makes it difficult for us to overcome the problem that I have been talking about. We cannot be sure that the transfers of property or shares could occur without EU approval, and in the turmoil we might not get that approval, or it might be delayed. If that was the case, there would be no point in making the proposal. However, no one Parliament can bind a following Parliament. It does not have the power to do that, even if it wanted to, despite what some Ministers think. We are a sovereign nation. It will be helpful to the Committee to know that that is not my personal opinion, and that it is therefore not necessarily correct.
The Thoburn v. Sunderland city council case was on this very matter. With your permission, Mr. Illsley, I shall read a short paragraph from the conclusion. Lord Justice Laws stated:
“Whatever may be the position elsewhere, the law of England disallows any such assumption. Parliament cannot bind its successors by stipulating against repeal, wholly or partly, of the 1972 Act. It cannot stipulate as to the manner and form of any subsequent legislation. It cannot stipulate against implied repeal any more than it can stipulate against express repeal. Thus there is nothing in the 1972 Act which allows the Court of Justice, or any other institutions of the EU, to touch or qualify the conditions of Parliament’s legislative supremacy in the United Kingdom. Not because the legislature chose not to allow it; because by our law it could not allow it. That being so, the legislative and judicial institutions of the EU cannot intrude upon those conditions.”
It is quite clear from that judgment that any Government could put a little line in, as my amendment does, to take the EU law out of a specific Act. That can be implied or real. In here it will be real because we are saying it. Is it the Government’s view that the Bill as it stands would allow all these special provisions to occur without any regard to EU law? If that is the case, I will be content, but I still think it would be useful to have my amendment. If it adds nothing, it does not damage the Bill. However, it may help to clarify the position so that the law is as I think the Government want it to be. Therefore in this extreme emergency, which we hope will never occur, there will be clarity that what the British Government and this Parliament decide is the law and cannot be overturned by a small group of judges in Luxembourg who say, “By the way, you cannot have temporary ownership of the bank. You cannot sell it on privately despite the fact that you have torn up all your own laws of contract or your competition laws.”
I do not want the Minister to tell us that we are the heart of Europe and that that will never occur. We are talking about extreme circumstances. I need to know, before deciding whether to press the amendment to a vote, whether the Government intend our law to be supreme or whether they accept that the EU will look at our decisions and then decide whether we can proceed. If that happens there will be delay and there would not be clarity. I am grateful to the Committee for listening to that point and I shall be interested to hear what the Minister has to say in response.
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