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. 1.45
pm 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
17Continuity 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
19Directors 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” and
“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? 2
pm 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 restriction...by 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). | 
