Banking Bill

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Ian Pearson: Clauses 16 and 31 set out the effect of a transfer of the securities or the property, rights and liabilities of a failing bank by an instrument or order made under this part of the Bill. In particular, the clauses specify that a transfer may take effect in law by virtue of the instrument or order. Subsection (3) of each clause specifies that a transfer is to take effect despite any restriction arising by virtue of contract or legislation or in any other way. The purpose of these provisions is to ensure that a transfer of securities is effective in law and takes place in spite of any restrictions that might otherwise exist.
Amendments Nos. 113 and 114 insert a new subsection (3A) into clauses 16 and 31. They specify that a transfer may take effect despite any restriction arising by way of a provision in European Union law. As honourable Members will be aware, Member States must not legislate in a manner contrary to Community law. We do not believe that we are legislating in such a manner with the production of the Banking Bill.
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As Members will know, we always declare at the start of our Bills that they comply with the Human Rights Act 1998 and that they are compatible with convention rights. We do not say that they are compatible with EU law because we would not produce a Bill if it were not compatible with EU law. I am happy to inform the hon. Member for Wellingborough that there is nothing in this legislation that is incompatible with Community law. Indeed, the Government strongly support the general principles of the EU state aid framework and we work closely with the European Commission and Parliament on state aid related matters.
What the hon. Gentleman seeks to do through these amendments, however, is in our view clearly illegal. The provisions of the amendments would place the UK in breach of our obligations under the EC treaty, would damage our reputation in the EU and, if not corrected, would lead to legal proceedings against the UK. We cannot accept what are in effect law-breaking amendments. Nothing proposed in this legislation should give the hon. Gentleman any concern that there would be unnecessary delay in exercising the powers of the special resolution regime.
Mr. Gauke: Where clause 16 refers to a transfer taking effect
“despite any restriction arising by virtue of...legislation”,
is the Minister saying that that is arising as a consequence of any UK legislation and that that carve-out does not apply to EU legislation?
Ian Pearson: In essence, that is what I am saying. We operate within a framework of Community law. It is not appropriate to go into the detail. I appreciate that the hon. Gentleman does not want anything to get in the way of speedy resolution when the situation of a failing bank arises. The Bill as it stands will allow speedy resolution to take place and clauses 16 and 31 are appropriate as they stand.
Mr. Bone: I am partially reassured by what the Minister has said. I am pleased that the Government are not bringing forward a Bill that goes against EU law but, of course, the Government never think they are bringing forward a Bill against EU law until the justices in Luxembourg decide that they have.
My problem is that the envisaged situation will be a national emergency. It will be a crisis of enormous significance, such as we saw recently when the Government did act before getting approval from the EU and the EU had to catch up afterwards. In reality, the Government ignored the EU and persuaded it afterwards of the need to approve. I see no harm in inserting my words because they do not change the matter. If the Minister is right and the Bill complies with EU law there is no problem.
I have one question that I am not sure about. The Minister says that this legislation will not cause delays but we have seen a delay with the share placements and the preference share subscription documents relating to the £42 billion of investment by the Government into private banks. The delay has come about because in those documents, which I have read in detail, the preference share investments cannot be repaid for a minimum of five years and no dividends can be paid. Those sections of the agreements are very strange and do not make any commercial sense. They were inserted because of European Union law. Those investments have been delayed and have not taken place, despite the Government saying that they have, because commercially banks need to pay dividends to make them a marketable security. There are renegotiations at the moment, which are being widely reported in the Financial Times. Whichever way we look at it, there is clearly a delay. The situation is not of the scale that we might envisage in which the whole of the financial system was collapsing.
I am reassured by the Minister in one respect and concerned in another, but I think that I have made a mistake. I have looked at the drafting again—it is not well drafted—and it misses out the important factor that the judges must interpret it in such a way, which I should have said. I do not think that it would be right for me to press an amendment that is incorrectly drafted. The principle is still of great importance and I would like to come back to it at a later stage. I beg to ask leave to withdraw the amendment.
The Chairman: For the benefit of the Committee, the Clerk and I are of the opinion that it is perfectly well drafted, which is why it was accepted for debate.
Amendment, by leave, withdrawn.
Clause 16 ordered to stand part of the Bill.

Clause 17

Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I want to check with the Minister what the clause means, as it is not entirely clear from the explanatory notes where we are heading with it. I think that the objective is to ensure continuity of service, so that if the failing bank has a range of contracts with IT suppliers and the other bodies that a bank needs to function, those contracts will transfer to the bridge bank or to the new private sector provider. I want to ensure that that is the case.
Where does the provision sit with the fairly standard contract provision that allows a supplier or provider to withdraw from an agreement if there is a change of control? There clearly will be a change of control if a bank is moved from one set of shareholders to, say, a new private sector purchaser or to the Bank of England through a bridge bank. Ordinarily, the supplier would be able to withdraw from the contract if it was unhappy with the new owner. It is unlikely that a supplier would be unhappy with the Bank of England, but it may be unhappy, due to its history, with a new private sector owner. I want to know whether clause 17 overrides change of control provisions.
Heritable Bank, which is in administration, is unable to collect the direct debits used to meet mortgage payments because its agent has yet to reach a satisfactory agreement with the administrator. That arrangement falls outside the scope of the Bill, but what arrangements are there to ensure that the right legal steps will be in place in a future failed bank situation so that there is continuity of service? I think that we all agree that it is better to have continuity of service in, for example, the way that people operate their bank accounts, than to have to use the Financial Services Compensation Scheme. Is the clause about ensuring continuity of service? How will change of control provisions be dealt with, and what powers are available to ensure that third parties provide continuity of service when they do not want to or find some challenge in doing so?
Ian Pearson: The clause sets out that a share transfer instrument or order may provide for a transferee to be treated as the same person as the transferor. In the context of a shared transfer, that means that either a private sector purchaser or the Treasury may be treated as a shareholder of the failing bank. That is necessary to preserve the continuity of a failing bank’s arrangements at change of control and is essential to ensure that the bank can continue to operate after the transfer.
In particular, the clause provides that agreements entered into by a failing bank may be treated as made by, or done in relation to, the transferee. It also provides that an instrument or order may specify that anything that relates to anything transferred and is in the process of being done by the failing bank before the transfer date can be continued by or in relation to the transferee.
As the hon. Member for Fareham suggests, that is all about ensuring continuity in a transfer situation. For example, such a continuity provision removes the requirement that on or before the transfer the failing bank’s name be substituted in commercial documentation by that of the transferee. Provision may also be made in a transfer instrument or order to require or permit a transferor or transferee to provide each other with information and assistance. The transferee may require information about the IT services used by the transferor in order to maintain continuity of banking services to depositors.
The clause therefore makes some essential provisions to ensure that the failing bank can continue to operate following the transfer. The provision is necessary to ensure that the transfer of securities is fully effective. A transferor may hold information that is important for the conduct of the resolution, so in some situations it is appropriate that the authorities should be able to require the transferor to supply that information. It is not a one-way requirement. The clause also provides that a shared transfer instrument or order may provide for a transferee to supply the transferor with information and assistance that might be necessary.
The provisions would not be used to arrange for new agreements, such as for services and facilities to be provided to a transferee. The continuity obligation powers in clauses 57 to 60 provide the powers in that regard, and we will obviously discuss them in due course. I hope that brief explanation provides the hon. Member for Fareham with some assurance.
Question put and agreed to.
Clause 17 ordered to stand part of the Bill.
Clause 18 ordered to stand part of the Bill.

Clause 19

Question proposed, That the clause stand part of the Bill.
Mr. Hoban: I want to understand what clause 19 allows the Bank to do, because it sounds interesting. A share transfer instrument may enable the Bank and a share transfer order may enable the Treasury
“to remove a director of a specified bank”,
which presumably means to sack him, and
“to vary the service contract of a director of a specified bank”,
which I assume means to pay him less and remove his entitlement to bonuses—a topic that has had a little airing over the last few months.
The instrument may also enable the Bank or Treasury
“to terminate the service contract of a director of a specified bank”
“appoint a director of a specified bank.”
The clause gives the Bank and the Treasury significant powers to vary the board of directors and would enable them to remove the lump sum failure bonus that directors sometimes receive when their contract is terminated. There has been much criticism of that sort of practice. Does the clause enable the Treasury to stop such big pay-offs?
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Mr. Mark Todd (South Derbyshire) (Lab): I was drawn by the particularly sweeping nature of the clause, but I then assumed that it is governed by normal contract law in other senses. It must therefore be part of both a negotiation with the individual involved and also subject to the normal commitment to honour a contract that has been entered into freely between two parties.
Mr. Hoban: I would guess so, too, but we are in uncharted waters with the Bill. All sorts of new powers have accrued to the Treasury and the Bank to enable them to vary other types of contractual arrangements, which makes me wonder just how far they will go.
Mr. Gauke: A few moments ago we were debating clause 16. Admittedly it relates to effecting the transfer, but it states that it takes effect
“despite any virtue of contract”.
I do not think that will extend to the provisions in this clause, but there is provision in the Bill for normal contract law not to apply in some circumstances. The Minister might be able to tell us whether it could apply to the clause.
Mr. Hoban: Indeed. My hon. Friend demonstrates the value of having a legal background. My purpose is to probe the extent to which these powers can be exercised. Those who are ardent critics of the bonus culture in the banking system and who would not want to see directors being given lump sums to be paid off—I have heard such expressions of concern from the Back Benches in various debates over the last month—would fall upon the clause with great glee assuming it has achieved some of their goals. I fear that the Minister might disappoint them.
Mr. Todd: It does not permit capital punishment of directors.
Mr. Hoban: Indeed it does not, but there is still Report.
Will the Minister clarify the scope of the clause? To what extent does it enable the Bank or the Treasury to override some of the contractual terms that a number of people find so objectionable?
Sir Peter Viggers: As my hon. Friend has pointed out, subsection (1) gives four powers to the Bank of England and subsection (2) gives four similar powers to the Treasury. Subsection (3) states:
“Appointments under subsection (1)(d) are to be on terms and conditions agreed with the Bank of England.”
Subsection (4) states:
“Appointments under subsection (2)(d) are to be on terms and conditions agreed with the Treasury.”
That leads to some rather strange drafting:
“A share transfer instrument may enable the Bank of England... to appoint a director... on terms and conditions agreed with the Bank of England.”
Either the clause is superfluous, because one would assume that an appointment is to be made on terms that are agreed with the Bank of England and it should thus be struck out, or it is necessary to state that the appointments are to be
“on terms and conditions agreed with the Bank of England.”
As that applies only to paragraph (d), it follows, as night follows day, that it does not apply to paragraphs (a), (b) and (c). Which is it?
It is a most peculiar piece of drafting, because as the hon. Member for South Derbyshire pointed out, it seems to follow that the normal rules of contract would apply. If appointments are to be made by the Bank of England or the Treasury, they will make them on terms that they agree with the relevant parties. I would like to know whether subsections (3) and (4) are superfluous and why they do not apply to paragraphs (a), (b) and (c).
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