Banking Bill

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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 21

Termination 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 25

Supplemental 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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