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withdrawn.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
34Licences
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.” Concern
has been raised with us that the clause, as currently drafted, appears
to have the effect that the licence endures only for the benefit of the
transferor, as opposed to the transferee, which I do not think is the
intention. The amendment would mean that both the transferor and the
transferee gain the benefit of the licence. I expect the Minister to
confirm that the amendment accurately reflects the intention behind
clause 34(1) and that the clause, as currently drafted, would not have
that effect. Our intention in tabling the amendment is to ensure that
the Minister dispels any ambiguity that might exist in the current
drafting. 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
35Termination
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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