Banking Bill

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Sir Peter Viggers: I do not wish to oppose the clause. In noting its importance, I assume that the word “property” in the present context means anything capable of being owned. I assume that it is a broad definition and not restricted to real property. I assume that the word “foreign” means anything that is not susceptible to UK law. I can see that the Government are trying to make the proposals as comprehensive as possible. They need to be sweeping proposals because the subject with which we are dealing is extremely complicated.
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My hon. Friend the Member for Wellingborough referred to American law but I think I am correct in saying it is not American law that would govern such a contract but the law of Delaware or California or Rhode Island. That, too, is a complication.
Some of the instruments that can be brought forward can be extremely opaque. I remember that the most opaque instrument I was capable of creating when I operated many years ago was a Liechtenstein Anstalt, which is an unincorporated body in Liechtenstein, controlled by Virgin Island bearer shares, which is almost impossible to work through. It is a very opaque suitcase. So we are dealing with complicated fields which can require very sweeping provisions.
Subsection (6) says that
“an obligation imposed by this section is enforceable as if created by contract between the transferor and the transferee.”
That is a sweeping provision indeed. Similarly, subsection (7)(b) says that
“obligations imposed by direction are enforceable as if created by contract between the transferor and the Bank of England.”
It is important that we keep a sense of proportion in having these sweeping provisions. If one goes too far with them it may well be resented by foreign legal bodies and diminish foreign law recognition. I would be reassured if the Minister could tell me that this point has been considered, that we have gone as far as we need to go and no further, that careful consideration has been given to foreign law recognition and that he is confident that, insofar as it is possible to ensure the certainty that he desires, this will indeed be the result.
Ian Pearson: Let me try to answer some of the direct questions that have been asked. The hon. Member for Gosport asked about the definition of foreign. I refer him to subsection (8), which makes it clear that this is a jurisdiction other than the UK. I am happy to confirm that property has a wider definition and is not confined to real estate.
This is an important clause. Subsection (3) states that
“the transferor and the transferee must take any necessary steps to ensure that the transfer is effective as a matter of foreign law.”
It is not the case, as the hon. Member for Wellingborough suggests, that we have to have extensive dialogue with other jurisdictions. We are trying to ensure that the transferor and the transferee fulfil obligations that we are imposing to take the necessary steps to help bring about a successful resolution.
Subsection (4) makes provision for the period before a transfer may be fully effective as a matter of foreign law. For this period the transferor must act on behalf of the transferee by holding any property or right for its benefit and discharging any liability on its behalf. Subsection (5) makes it clear that expenses incurred by the transferor in relation to these acts must be met by the transferee.
The hon. Member for Gosport raised some issues about what he regarded as the sweeping powers and obligations under subsections (6) and (7). As I sought to make clear in a previous debate on an amendment, we believe that it is important that there is enforceability as a contract in the unlikely instance where someone might be unwilling to comply. As I explained, in those circumstances there will be potential remedies that the authorities could bring, such as a claim for substantial damages. Other contractual remedies could potentially be available to encourage compliance with the obligation, and I mentioned an interim injunction or an order for specific performance. We think that it is right that those enforcement powers are contained in those subsections. As a general matter of course, however, we would expect to reach agreement with both the transferor and the transferee about the circumstances that will pertain with regard to foreign property. As is always the case when framing legislation, it is of course appropriate to consider every eventuality, and that is what we are seeking to do with some of the wording in the clause’s subsections.
Question put and agreed to.
Clause 36 ordered to stand part of the Bill.
Clause 37 ordered to stand part of the Bill.

Clause 38

Question proposed, That the clause stand part of the Bill.
Mr. Gauke: I will raise two brief points on clause 38, which relates to the procedure followed after a property transfer is made. The Bank of England is required to send a copy to the relevant bank, the Treasury, the Financial Services Authority and any other person specified in the code of practice. I want to raise the issue of the role of Parliament. I am not suggesting that Parliament can or should be included within that list, but I assume that the Treasury would make available a property transfer instrument to Parliament, or would that not be possible because it contained information of a sensitive commercial nature?
My second point confirms that that would not be confidential because a copy of the instrument will be placed on the Bank’s website and in two newspapers. I would be grateful if the Minister could provide some guidance on that. Clearly, putting something on the website is cheap, but placing a copy of it in two newspapers might be expensive. Is that what the Government normally do, and what newspapers do they have in mind? From my memory of legal practice I know that notices used to be published in the London Gazzette, but I do not know whether that is what the Government have in mind. Perhaps the Minister could elaborate on which newspapers the Government intend to publish a copy of the instrument in.
Ian Pearson: The clause sets out various procedural provisions in relation to property transfer instruments and is analogous to clause 23, which makes similar provisions for share transfer instruments. Naturally, the making of a property transfer instrument will follow a period of intensive consultation between the authorities, and that is required by the provisions of clauses 7, 8 and 9, which we have already considered. The Clause adds to that process by providing for a formal requirement for the Bank of England to send a copy of the instrument to the FSA and the Treasury.
As the hon. Member for South-West Hertfordshire suggests, the clause also provides that the Bank of England should publish a copy of the instrument on its website and in two newspapers. We think that that is a reasonable requirement, designed to ensure that an instrument producing legal effects is adequately publicised and that all appropriate parties are fully aware of the transfer. In practice, given the ubiquitous nature of modern media, it is difficult to imagine a transfer being carried out under the radar, but I confirm that it is not our intention to do so. That is why we make it explicitly clear in clause 38(2), which overall is a relatively uncontentious clause.
Mr. Bone: Other than not knowing which two newspapers, the contents of the clause are not contentious. That sort of detail has not been published on the current nationalisation of the three banks, although some draft memorandums of share transfers have been placed in the Library. Will the Government publish in that way the details of the current situation, even before the Bill goes through the House?
Ian Pearson: I shall confine my comments to the Bill. I stress again that we believe that it is right that the instrument is adequately publicised, because it alters legal rights. Publication in newspapers, in addition to on the Bank’s website, seems the most appropriate option. How much detail will be in the instrument will depend on the individual case. We have an appropriate procedure in the clause for the making of the property transfer instrument, and I urge that the clause stand part of the Bill.
Question put and agreed to.
Clause 38 ordered to stand part of the Bill.

Clause 39

Supplemental instruments
Ian Pearson: I beg to move amendment No. 96, in clause 39, page 17, line 39, leave out subsection (5).
The Chairman: With this it will be convenient to discuss the following: Government amendment No. 97.
Government new clause 12—Reverse property transfer
Government new clause 13—Temporary public ownership: reverse property transfer.
Ian Pearson: The measures in this group are analogous to those that we debated under clause 25 on the share transfer powers.
I have already referred to the general context in which transfers may take place. The general principle is that due to the swiftness with which the authorities may have to act, and the complex nature of the businesses that they are acting on, it is sensible to provide for considerable flexibility. These measures provide further flexibility for supplemental and reverse property transfers.
Supplemental and reverse property transfers provide particularly valuable flexibility for property transfers. Not only do the powers provide the Bank of England with the means to ensure that an initial property transfer is effective, but they may also produce a better outcome for the resolution. For example, a further transfer of property to a bridge bank may increase the value of the bridge bank, in turn increasing the amount that a private sector purchaser is prepared to pay for the business. That will be treated as proceeds of resolution under a bank resolution fund, the net proceeds being available for the failing bank.
The Bill already provides flexibility to the Bank of England to make supplemental transfers in relation to the bridge bank stabilisation option. The Government consider it desirable to extend that power. Amendment No. 96 provides the Bank of England with the flexibility to effect a supplemental property transfer to a private sector purchaser. As I made clear in the debate last week on the analogous Government amendment for supplemental share transfers, the measure would be used where a transfer to a private sector purchaser had occurred at speed and before all due diligence could be completed. In that situation, a supplemental transfer of property could be made to ensure that the purchaser had all the relevant things for carrying on the banking business effectively.
The existence of the power should increase the likelihood of an immediate private sector solution being successful, as commercial purchasers are assured that the authorities have the means to ensure that the transfer is fully effective. However, I should emphasise that a supplemental transfer would never be made simply because a private sector purchaser had requested it. The action would have to meet the resolution objectives, and the authorities would have to consider it necessary and proportionate.
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In summary, the Government amendments provide the flexibility to make reverse property transfers subject to one constraint—that property may not be transferred back from the private sector purchaser.
It may help the Committee if I provide some examples of how the power may be used. If the Bank of England had transferred the majority of a failing bank’s business to a bridge bank but it became clear in due course that some small aspect of its balance sheet was not attractive to a private sector purchaser, that item could be transferred back to the failing bank, allowing the bridge bank to be sold. Another example would be using the power to transfer back if a particular class of asset suddenly deteriorated in quality. In summary, the powers may be used to optimise the balance sheet of the bridge bank.
The partial transfer safeguards apply to supplemental and reverse property transfers. They offer three protections. First, the authorities will need to provide the same degree of protection to set-off and netting arrangements when effecting supplemental and reverse property transfers. Secondly, security interests will need to be protected. Thirdly, supplemental and reverse property transfers will need to be taken into account when determining the compensation amount for creditors left in the residual bank. I look forward to debating those safeguards in detail when we come to clauses 42, 43 and 55.
In addition, the Government consider it appropriate to introduce another safeguard to run alongside the flexibility provided by the amendments. It is proposed that secondary legislation should set out a list of property rights and liabilities that may not be transferred back. For example, if a creditor in a bridge bank thought that the bridge bank would be transferred back to the failing bank, the creditor may not have sufficient confidence to continue doing business with the bridge bank. In broad terms, the Government therefore propose to protect liability holders from being transferred back. That, of course, includes depositors. I emphasise that in no circumstances would protected depositors be transferred back. The consultation document on safeguards, published last Thursday, provides further detail on this point; the document also consults on what types of asset and liability should be protected.
To conclude, the Government consider this group of amendments and new clause to be a worthwhile addition to the Bill. I remind the Committee that when using the powers provided by the amendments, the authorities must have regard to the special resolution objectives. They will guide any decision to make a supplemental or reverse property transfer. I hope that the Committee will accept the amendments and new clauses.
Mr. Gauke: The Minister was right to mention safeguards in this context. I hope that we will turn to them shortly, although I note that according to the discussion paper that the Government produced last week, they are at an earlier stage of development than others, and draft secondary legislation has not yet been prepared. We are therefore unable to debate the detail of reverse and supplemental transfers today. We will return to that subject later.
The Minister gave hypothetical examples of how the provisions in the Government amendments and new clauses would be of assistance. That was a great help. However, as the Treasury’s consultation paper makes clear, the amendments are driven by
“the light of recent experience”.
We may talk about hypothetical examples, but partial property transfers have already happened. We have seen it with Bradford & Bingley and with Kaupthing and Heritable. The Government are therefore able to benefit from the experience of those processes to find weaknesses within the system and seek to improve it.
It seems that the amendments, which have come relatively late in the process, derive from the experience of Bradford & Bingley and the Icelandic banks. The Minister will correct me if I am wrong, but that is the impression given by the Treasury document, which on two occasions says that in the light of recent experience, the Government consider it appropriate to increase flexibility.
We are not against flexibility in these circumstances. We have some sympathy with what the Government are seeking to do and the Minister made a reasonable case for the provisions. However, they seem to be a consequence of something happening in the Bradford & Bingley and Icelandic bank cases, so it might help the Committee if the Minister could explain the particular problems that arose in those cases and why the clauses would be helpful. He gave examples which sounded hypothetical, but are they in fact rooted in the experience of the past few weeks?
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