Banking Bill

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Mr. Bone: Earlier in the debate—indeed, throughout the debate—we have heard that we do not need to put the words in the Bill because it already complies with Community law. Anything in Community law applies to the Bill, so the words are unnecessary. If we take them out, and if the Government are right, the context does not change because the European Communities Acts apply. The wording seems superfluous and we try not to include such wording in Bills. I cannot see the logic of putting it in when it already applies and we have not put those references in anywhere else.
Ian Pearson: I cannot see the logic of taking the wording out. I am advised that those are not superfluous words and that they are needed to ensure that we have a broad and encompassing definition to make it very clear that any property rights and liabilities that are included in EU legislation could be transferred under the powers in clause 32, if the special resolution regime was engaged.
I want to be clear. The reference is not intended to suggest that the Government will legislate in a manner incompatible with Community law, as I explained previously. That is not possible and the Government would not seek to do it. I hope the hon. Gentleman and members of the Committee are satisfied that the provisions in the clause are appropriate, needed and sensible, and I hope the hon. Member for South-West Hertfordshire will withdraw his amendment.
11.15 am
Mr. Gauke: I am grateful for the Minister’s response. As I said in my opening remarks on the amendment, my intention was to flush out exactly what the Government had in mind when they referred to EU legislation. I was not expecting milk quotas. The provision would appear, from what the Minister has said, to be largely precautionary and I have no objection to it other than that it seems vague. The Minister did not refer to passporting rights—I anticipated that they would be considered rights under an enactment, including EU legislation. I do not know whether passporting rights would fall under the provision. Although we did not receive the expected clarification, the Minister’s remarks were helpful. The wording does no particular harm, and I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: I have one question, which we could also address under clause 36 on foreign property. It concerns the rights and liabilities under the law of a country or territory outside the UK, which, according to clause 32, a property transfer instrument may transfer. There will always be foreign law issues, and there may be a clash between these provisions and foreign law. A particular issue is that under our arbitration Acts we acknowledge and respect decisions made by foreign arbitrations, but it is not entirely clear how the provisions in clauses 32 and 36 relate to those Acts.
I do not expect the Minister to respond on that point, but I mention it as something that he and his advisers might want to consider. There may be nothing to it, but it might be helpful for the Committee that I have mentioned it. It also might be helpful if the Minister, either now or under clause 36, told the Committee how the relationship between foreign law and the provisions will work, and whether there are difficulties with transferring rights and liabilities under foreign law when we are not necessarily in a position to do so.
Ian Pearson: It is important that a property transfer instrument is able to transfer all of a failing bank’s property. If a crucial element of a bank’s business were left behind, that could jeopardise the effectiveness of the transfer. If a private sector purchaser believed that to be a material risk, it might not agree to take part in the transaction. With a property transfer to a bridge bank, if some property could not be transferred, that might reduce the likelihood of an ultimate sale or increase the risk to public funds. That is why the clause is particularly necessary.
The inclusion of foreign property in the scope of the clause is crucial, given the international and multi-jurisdictional nature of many of the UK's banks. At the moment, I do not have a direct answer to the arbitration point raised by the hon. Gentleman, but we can discuss it further under clause 36 and the obligations there, because we need to ensure that a transfer of foreign property is effective. Overall, the clause underpins the effectiveness of the Bill’s property transfer powers, and I urge that it stand part of the Bill.
Question put and agreed to.
Clause 32 ordered to stand part of the Bill.
Clause 33 ordered to stand part of the Bill.

Clause 34

Mr. Gauke: I beg to move amendment No. 137, in clause 34, page 15, line 20, leave out ‘despite the transfer’ and insert
‘as if the transferee is the transferor’.
The amendment addresses a drafting issue. Clause 34(1) states:
“A licence in respect of anything transferred by property transfer instrument shall continue to have effect despite the transfer.”
Ian Pearson: The clause provides for a property transfer instrument to make provision in relation to licences, and the purpose is to ensure that, if any banking business transfer relies upon a licence, appropriate provision may be made to ensure that the transfer is effective. An important example is any form of IT licence granted to a deposit taker that might give it permission to use a particular type of system to operate its business. To ensure continuity of banking services, it is important that those licences are valid after a transfer.
The hon. Gentleman proposes to amend the phrasing of subsection (1). I accept that the provision set out in subsection (1) is broad, but I also point out that subsections (2), (3) and (4) provide for the power to be refined to the particular resolution. For example, if it was in the public interest to exclude a licence from the operation of the clause, the property transfer instrument could provide for that. There is also the flexibility to apportion responsibility for compliance with a licence between a transferor and a transferee. Given the scope for refinement and honing, I consider the original wording to be preferable. The amendment also overlaps with the continuity provisions, which can be made under clause 33. Therefore, I ask the hon. Gentleman to withdraw the amendment, and if it is pressed to a vote, I urge members of the Committee to reject it.
Mr. Gauke: I am not sure that the Minister has quite got to the heart of my concern, which was not so much that subsection (1) was too broad, but that in a way it was too narrow. It seemed to suggest that the licence endured only for the benefit of the transferor, which is not the intention behind the clause, unless the Minister wishes to say otherwise. What the Minister has said makes the intention of the clause clear: the licence will apply for the transferee as well as the transferor. That provides sufficient clarification for me, so I will not press the amendment, but I am not sure that the Minister’s remarks quite got to the heart of my concern.
Ian Pearson: I apologise for not covering that point. Subsection (1) states that the licence has effect with respect to the transferred property. The transferred property is transferred to the transferee. So I can confirm that it is the intention of the clause that relevant licences apply to the transferee.
Mr. Gauke: I am grateful for that explanation. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
Mr. Gauke: My question relates to subsection (3) which states:
“Where a licence imposes rights or obligations, a property transfer instrument may apportion responsibility for exercise or compliance between transferor and transferee.”
In a scenario where the responsibilities are apportioned to the transferor and transferee and the transferor does not comply with the responsibilities under the licence—perhaps he is in breach of a systems licence—what rights does the transferee have? How is the apportionment enforced? The transferee could be dependent upon the transferor complying with a particular licence and if the transferor does not do so, the transferee appears to be in a vulnerable position. Again, this comes back to the question of certainty and ensuring that we have a system in place that is supportive of transferees to make it an attractive proposition.
There is nothing about this in the clause—it may be elsewhere—and in those circumstances it seems that apportionment may leave the transferee vulnerable. An amendment to the clause might provide the transferee with an ability to enforce the obligations contained within a licence or perhaps for it to take over those obligations subsequently. I am sure that the Minister will appreciate my concern. I do not claim that there is an easy solution, but I throw it open to the Committee and ask the Minister to explain how the Bill as currently drafted seeks to address the problem.
Ian Pearson: I understand the point that the hon. Gentleman is making about subsection (3). In normal circumstances the property transfer instrument would determine the apportionment of responsibility for exercise or compliance between the transferor and the transferee and it would have been expected that both the transferor and the transferee would be content with the instrument that was being applied. The enforcement of the licence will depend on the circumstances, but the effect of the exercise of the power under the clause will be to alter the legal entitlements under the licence, whether under private or public law. I hope that provides at least some clarification for the hon. Gentleman. If there is anything more that he wishes to raise, I would be happy to consider it.
Mr. Gauke: For clarity, is the Minister essentially saying that the property transfer instrument is the agreement that will address this point and that the transferee may well have a contractual right against the transferor to deal with this matter?
Ian Pearson: Yes, indeed. That is my understanding.
Question put and agreed to.
Clause 34 ordered to stand part of the Bill.

Clause 35

Termination rights, &c.
11.30 am
Mr. Gauke: I beg to move amendment No. 138, in clause 35, page 15, line 34, at end insert ‘or’.
The Chairman: With this it will be convenient to discuss amendment No. 139, in clause 35, page 15, leave out lines 37 to 41.
Mr. Gauke: The clause relates to termination rights. In particular, it contains a definition of “default event provision” and provides a list of circumstances. Amendment No. 139 would delete items (e) to (i). We are raising a query because the items provide examples of circumstances that do not appear to be termination rights or default events as such but could cover almost any obligation under a contract.
For example, item (e) reads,
“a sum becomes payable or ceases to be payable”,
and item (f) reads,
“delivery of anything becomes due or ceases to be due”.
Item (h) reads,
“any other right accrues, changes or lapses”,
and (i) reads,
“an interest is created, changes or lapses”.
Those situations are quite broad and might happen in the course of a contract without any suggestion of a default event. Will the Minister clarify why those subsections are there? Does he recognise the concern that, given the current drafting of clause 35, a default event appears to be very broadly defined, and will he explain to the Committee why that is the case?
Ian Pearson: The clause sets out certain provisions relating to events of default and makes similar provisions to those in clause 21, which we debated last week. As has been noted, events of default are extremely common in contractual documentation. If the act of making a transfer or events leading up to that act triggered contractual rights for parties to terminate or modify their contractual arrangements with a failing bank, it could reduce significantly the bank’s ability to continue as a going concern. That would reduce the value of the business transferred and might even render resolution under the special resolution regime impossible. Clearly, that would have a number of significant implications for the resolution.
A transfer of property 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. Therefore, the provisions in the clause specifying that the authorities may turn off event of default clauses are extremely important for a successful transfer.
Subsection (1) defines a default event provision. The hon. Gentleman’s amendment would significantly narrow that definition. In broad terms, what he seeks to achieve is to carve out events that do not relate specifically to the right to terminate, modify or replace agreements. Although the amendment would still provide the authorities with the means to turn off any right to terminate, they would not have the power to turn off other rights that might accrue through the exercise of the property transfer power. We believe that the existence of those rights could pose significant challenges to the resolution.
For example, suppose that the counterparty could create the right for a penalty sum to be payable if the property transfer powers were exercised. That could require the authorities to pay a substantial sum if relevant property were transferred to either a bridge bank or a private sector purchaser. That would not be in the public interest, and could have the same economic and commercial effect as a right to terminate the agreement, or perhaps an even more adverse effect.
The hon. Gentleman says that the powers are very broad. They are far more refined than the powers taken in the Banking (Special Provisions) Act 2008, which includes powers for authorities to turn off any event of default of any person having a specified connection with a deposit taker, a very broad power indeed. In contrast, the provisions in clause 35 are significantly more refined. The default event provision cannot be entirely unrelated to the transfer. Instead, it must be related to
“the making of the [property transfer] instrument...anything that is to be, or that may be, done under or by virtue of the instrument, and...any action or decision taken or made under this or another enactment in so far as it resulted in, or was connected to, the making of the instrument.”
They are also designed to be adapted to particular circumstances. Therefore, where practicable, an event of default could be modified rather than entirely disapplied, as provided for in subsection (4). The very broad powers in the Banking (Special Provisions) Act 2008 have been narrowed following consultation and contained in clause 35.
I hope that I have demonstrated to the Committee that this clause is necessary and that the amendments would place an unwarranted restriction that might get in the way of a successful resolution.
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