Mr.
Bone: I direct the Committee’s attention to
subsections (1)(b) and
(2)(b), “to
vary the service contract of a director of a specified
bank”. If
that is, as my hon. Friend the Member for Fareham suggests, the ability
to chop people’s bonuses or ensure that they do not get huge
redundancy payments, it will be welcomed by the general public. Do the
Government not have a problem with that, however, in that it would
immediately offend European law? The front page of the Bill states that
the Bill complies with the Human Rights Act, but those provisions would
not comply with the human rights of the person who was having their
salary chopped and their terms and conditions messed about with. The
Minister said earlier that everything in the Bill complies with
European Union law, so perhaps my hon. Friend’s interpretation
is not what the Government
intend.
Ian
Pearson: The clause provides that a share transfer
instrument or order may enable the Bank of England or the Treasury to
appoint or remove directors. It also provides that the instrument or
order may confer on the Bank or the Treasury the powers to vary or
terminate the service contracts of directors. It is absolutely right
that it should do so. People would not expect the Government to do
anything less with regard to a failing bank. The powers are
wide-ranging, and it is right that they are in the
Bill. The
provision gives the authorities the necessary powers to put appropriate
management in place, once control of the failing bank has been
transferred. It is critical that the deposit taker has a board of
directors with the appropriate expertise to manage the business.
However, members of the board may have resigned immediately before the
transfer, or the board may not have the necessary expertise or may no
longer be appropriate to manage the bank. It is, therefore, vital, in
the interests of the resolution, that the authorities can remove and
appoint
directors. We
consider it appropriate for the authorities to be enabled to make
specific provision in an instrument or order in respect of the
directors of the board, because the procedures for the appointment and
removal of a director set out in the bank’s articles of
association and in company law may be time-consuming. Further, it is
likely that the right of appointment or removal of a director may be
conferred only on members of the company, which would mean that the
Bank of England would be unable to make an appointment in the case of a
transfer to a private sector purchaser. Therefore, provision is made to
ensure that appropriate directors can be put in place expediently, in
all circumstances where the authorities consider that
necessary. On
Second Reading, the hon. Member for Dundee, East asked the Government
to consider whether it was appropriate for the Treasury—as well
as the Bank of England—to have those powers. I want to respond
to him now, although he is not in the room. I believe that it is
appropriate, because the Treasury may take a bank into temporary public
ownership as a last resort. If that occurs, it is right that the
Treasury should have the power to put in place the appropriate
management.
I
will try to be more specific on restricting payments. My hon. Friend
the Member for South Derbyshire raised this point. The terms under
which former directors were employed are a matter for the previous
board, and would be governed under normal contract law. The Bill
provides that the authorities may make provision in a share transfer
instrument or order to remove and appoint directors and to alter or
terminate the service contracts of directors, but normal contract law
would still apply. The authorities would want to put in place
appropriate remuneration arrangements for new directors. All such
management decisions would be made case by case, but it is likely that
some of the existing directors have already resigned, or it might be
felt that they should be required to do so.
It is also
likely that some existing members of management will still be required,
especially those with a high level of operational expertise for the
purposes of business and managerial continuity. In those circumstances
it is right that service contract variations should be in place that
could include variation of salary terms, bonus payments, tenure and
other matters. That might involve a period of negotiation and would
again be governed by employment and contract law. Again I want to make
it clear that the provisions we are debating are restricted to the
specific bank that is in the SRR. These are not general powers. I hope
that with those clarifications we can agree on clause
19. Question
put and agreed
to. Clause
19 ordered to stand part of the
Bill. Clause
20 ordered to stand part of the
Bill.
Clause
21Termination
Rights,
&c. Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: I am sure the Minister has copious notes to explain
the meaning of this clause. Having read the clause and the explanatory
notes, I am none the wiser as to what it means. I would be grateful if
the Minister explained it to the
Committee.
Ian
Pearson: I must apologise to the hon. Member for Gosport
for not replying to the points he made about subsections (3) and (4) in
clause 19 when he suggested that they were superfluous. With your
indulgence, Mr. Illsley, I would like briefly to explain
that they make it clear that the Bank or the Treasury can specify the
terms and conditions of appointments. Otherwise this provision would be
left to the board of directors to determine. We do not need to make the
same provisions for paragraphs (a) to (c), which is why the clause is
drafted as it is. I apologise for not replying to the hon. Gentleman in
the right
place. In
answer to the question by the hon. Member for Fareham about clause 21,
I am more than happy to explain. The clause sets out certain provisions
in relation to events of default. An event of default clause in a
contract gives a specified right to a counterparty if a specified event
occurs. For example, a contract could stipulate that a counterparty
should have the right to
terminate the contract if the bank’s credit rating changes or if
there is a change of control of the bank. This clause is important
since most modern contracts make heavy use of these
provisions. The transfer
of securities is likely to be characterised as an event of default
which would give counterparties the right to terminate or modify
contractual arrangements in the event that the authorities exercise the
transfer powers. Clearly, any termination of key contracts would
significantly reduce the likelihood of the deposit taker being able to
continue as a going concern. It could necessitate having to renegotiate
contracts, potentially with new counterparties, with no guarantee that
similar terms could be arranged. In extreme circumstances, for example,
if the majority of the bank’s counterparties sought to rely on
termination rights, the bank would be unable to continue its
operations. In addition, the act of counterparties terminating their
contractual arrangements with the deposit taker is likely to send a
strong signal to the market that other counterparties should not do
business with the bank. Thus, a number of counterparties closing out
contracts could lead to a wider counterparty flight from the deposit
taker, which would have severe consequences for the success of the
resolution. Therefore, this clause allows the authorities to make
provision for a shared transfer instrument or order to be disregarded
in determining whether a default event provision applies; in other
words, that such default event rights may be disapplied in relation to
a transfer of control by way of a shared transfer order or
instrument.
The powers
are designed to be tailored to particular circumstances and thus, where
practicable, an event of default might be modified rather than entirely
disapplied. The provisions, however, could not be used to override
financial collateral agreements, which are protected by the financial
collateral arrangements directive and which in broad terms must be
allowed to take effect in accordance with their
terms. 2.15
pm
This is an
area where, in the light of further analysis and consultation, the
Government have adopted a more restricted form of the powers than those
taken in the Banking (Special Provisions) Act 2008, which, for example,
apply to any person having a specified connection with a deposit taker
or any of its group undertakings. That is an essential and
proportionate provision for ensuring that a deposit taker can continue
to operate, notwithstanding any change of control as a result of the
powers under this part of the Bill.
Question
put and agreed to.
Clause
21 ordered to stand part of the Bill.
Clauses
22, 23 and 24 ordered to stand part of the
Bill.
Clause
25Supplemental
instruments
Ian
Pearson: I beg to move amendment No. 92, in
clause 25, page 11, line 23, at
end insert ‘— (a) provides
for the transfer of securities which were issued by the bank before the
original instrument and have not been transferred by the original
instrument or another supplemental share transfer
instrument; (b)
’.
The
Chairman: With this it will be convenient to discuss the
following: Government amendments Nos. 93 to
95. Government
new clause 10—Reverse share
transfer. Government
new clause 11—Bridge bank: reverse share
transfer.
Ian
Pearson: The group of amendments and new clauses provides
for additional flexibility to be introduced to the share transfer
powers relating to supplemental transfers, which are already provided
for in the Bill, and also reverses transfers, which are the subject of
the new clauses in the group. A similar group of amendments have been
tabled in relation to the property transfer powers. Those will be
debated when we reach clause
39. While
it is envisaged that the vast majority of any supplemental and reverse
transfers will be made in relation to property, the amendments
replicate those provisions for the share transfer powers. However, they
are not, of course, being introduced simply for the purpose of
consistency; there may be circumstances in which that added flexibility
is needed. It may help the Committee if I provide a brief introduction
to the concept of supplemental share and reverse share
transfers.
Recent events
have clearly demonstrated that resolution interventions may need to
occur with extremely short notice. In such situations, the due
diligence undertaken may only be preliminary. Further work may reveal
additional details about the nature of securities or, indeed, the
business that has been transferred. Supplemental transfers provide for
further transfers of securities from the holders of securities to the
relevant transferee. Reverse transfers provide for securities to be
moved back from a transferee to the original holders of the securities.
To take control of the bank, securities that confer control rights will
need to be transferred. Such securities may not be limited simply to
ordinary voting shares, but may include securities such as preference
shares and hybrid equity-debt securities, which may confer control
rights in certain contingencies. In circumstances where an extremely
swift transfer of ownership of a bank is required to protect financial
stability, it might not be possible to have an exhaustive list of all
the securities of the bank at the time of transfer. Moreover, in
general it is difficult to foresee exact circumstances that may come to
pass, so there is a need for flexibility. That particularly applies
given the complexity of institutions to which the powers are intended
to
apply. Many
banks have extremely complex capital structures, involving a broad
range of different classes of security, including forms of security
bespoke to the bank in question. It is worth noting that the powers may
not necessarily always be used to effect an actual transfer of
securities. Instead, they may be used to make provision in connection
with a transfer that has already been made. For example, a supplemental
order may provide simply for the conversion of securities, as permitted
by clause 18, or make incidental and consequential provision, as
permitted by clause 22. I accept that it would be desirable for such
supplemental and reverse transfers not to be required. However, for the
reasons that I have given, it is prudent to include the provision to
ensure that the stabilisation powers are suitable for dealing with the
broadest range of
circumstances.
I shall now
turn to the specific provisions of the amendments. Amendment No. 92
permits supplemental share transfer instruments to effect a further
transfer of securities to a commercial purchaser. An example of the
circumstances in which that may be necessary is where further due
diligence reveals that a person has a class of security other than
ordinary shares which nevertheless confers on that person some form of
right actually or contingently to control the failing bank.
Therefore it may be necessary to transfer that class of security in
order for the Bank of England to secure the full control of the deposit
taker for a commercial purchaser.
New clause 10
provides that the Treasury may make reverse share transfer orders. A
reverse share transfer order may be made in two circumstances: first,
following the transfer of a failing bank to temporary public ownership
in accordance with clause 12; and secondly, following an onward share
transfer to a publicly-owned transferee—a company wholly owned
by the Bank of England—the Treasury or a nominee of the
Treasury. As with all other forms of transfer, the Treasury must
consult with the Bank of England and the FSA before making the
order.
New clause 11
makes similar provision in relation to the Bank of England and bridge
banks. The clause provides that the Bank of England may make bridge
bank reverse share transfer instruments. Such instruments may be made
following the transfer of a bridge bank’s securities to a
publicly owned transferee.
Amendments
Nos. 93, 94 and 95 make technical clarifications. Amendments Nos. 93
and 94 make it clear that a supplemental share transfer instrument may
transfer any securities of a failing bank that have not previously been
transferred from their original holders. Amendment No. 95 makes it
clear that an onward share transfer from temporary public ownership may
transfer all the securities of the bank that have been
transferred by share transfer orders or issued after the original
transfer. This provides the Treasury with the flexibility to change the
bank’s capital structure before it is sold, for example, by
simplifying the nature of its securities.
Finally, I
would like to make two general points about the provisions of the
supplemental and reverse transfer clauses. First, members of the
Committee will note that the general and specific conditions of SRR
intervention do not apply to supplemental and reverse transfer
instruments and orders. It would not be appropriate for further
transfers to be subject to these conditions, as the initial transfer
may have stabilised the bank such that it no longer is, for example,
failing to meet its threshold conditions. Instead, these powers are
needed to give full and proper effect to a resolution where these
conditions have already been satisfied at the stage of the first
transfer. Of course, where these further transfers interfere with
property rights, the authority concerned must still be satisfied that
the action is proportionate to the public interest aim
pursued.
Secondly, a
general restriction has been placed on the powers to make reverse
transfers of securities. That is that such transfers should not be
possible following a transfer of securities to a private sector
purchaser. That restriction is achieved through exclusion—that
is to say, no provision has been made that would confer a power to
effect such a transfer.
The Government
do not consider it appropriate for the authorities to have this
flexibility. The securities will have been acquired by the private
sector purchaser as part of a commercial deal. The existence of
statutory powers to reverse the transfer which formed part of that
deal, without reference to the private sector purchaser, is likely to
introduce an element of risk which a purchaser may not be content to
take. That could reduce the likelihood of agreeing the transaction.
Therefore, in the interests of enhancing the chances of a private
sector solution, the Government are not including that power in the
provisions.
Recent
experience of resolving failing banks has clearly demonstrated the need
for flexibility. It has also shown that transfers may occur extremely
swiftly, with only limited time available for detailed analysis of the
banking business being transferred. For these reasons the Government
consider it necessary to amend the provisions of the Bill. Of course, I
accept that it would have been desirable to include these provisions
initially; but that was not possible. It would have been wrong to rush
through these changes before introduction of the Bill without a full
analysis. Such an analysis has now been undertaken, and we have
concluded that these powers are necessary.
Amendment
agreed
to. Clause
25, as amended, ordered to stand part of the
Bill.
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