Ian
Pearson: I fear that I shall have to disappoint the hon.
Gentleman. I do not want to get drawn into a detailed discussion of
Bradford & Bingley or Kaupthing Singer & Friedlander and Edge
as these are obviously very recent events. In response to those
circumstances and to the thinking that that has engendered within the
authorities, we believe that the flexibilities in the amendments and
new clauses could be beneficial in situations that might occur. We
believe that the additional flexibility could enable successful
resolutions and, as I indicated in my initial remarks, potentially
optimise the balance sheet of a bridge bank and make the transfer to a
private sector purchaser more likely.
Mr.
Gauke: I am not sure that it is entirely appropriate to
decline to discuss a matter because it arises from recent events. The
Committee is capable of discussing recent events. I stress that twice
in three paragraphs the Treasury document makes it clear that
amendments were introduced in the light of recent experience. It would
be helpful to the Committee to know what that recent experience
is.
Ian
Pearson: As I explained, recent experience is obviously
framed by specific situations in which the Government and the
authorities have taken action, but
it has also produced a great deal of thinking within the authorities
about what powers are needed. It has given us the opportunity to look
at hypothetical circumstances as well as real situations when framing
the legislation. As a result of those broad deliberations, we believed
that it was appropriate to provide additional flexibilities for the
future. I do not want to be drawn on the detail, not because I am not
happy to defend the actions that we have taken—far from
it—but there is still the possibility of future litigation, so
it is probably best that the detail of these matters is not directly
discussed.
Mr.
Gauke: I am grateful to the Minister. May I put it another
way? I take the point that events may inspire deeper thinking, new
circumstances may emerge and hypothetical circumstances may be
considered, but would he say that the inability to carry out
supplemental and reverse transfers in the Bradford & Bingley and
Icelandic cases has proven to be disadvantageous to the Government in
trying to address those matters?
Ian
Pearson: I do not want to get drawn on to that ground. We
should bear in mind that we often deal with situations in which action
needs to be taken very swiftly indeed, with only limited time for
detailed analysis. As I explained earlier, in some cases due diligence
will not have been possible. In those circumstances, having the
flexibility needed to take rapid action can help to maintain the value
of a failing bank. I think the hon. Gentleman broadly accepts what we
are trying to do with the powers and he is trying to press us on the
detail. I have explained to him why some of that is difficult, but the
powers are, in our view, worth while and
needed.
Mr.
Bone: I quite understand the Minister not wanting to be
drawn on the specifics of the Bradford & Bingley situation but, in
general terms and without being specific, would the Bradford &
Bingley transfers have been easier if these tools had been in
place?
Ian
Pearson: The actions that the Government have taken with
regard to Bradford & Bingley are entirely right, and those who look
at these matters from outside welcomed them. It is not helpful to try
to retrofit the experience of Bradford & Bingley into the
Bill’s deliberations, although I am being invited to do so. The
key learning points have been that the speed of events and the
uncertainty that often arises require the flexibility to take action
and the ability to transfer back, with safeguards in place, so that if
a deal is done with a private sector purchaser, we will not go back on
it. Being absolutely decisive and certain in that is helpful. The
measure is designed to allow successful resolutions in the future, and
I hope the amendment is agreed to.
Amendment
agreed to.
Question
proposed, That the clause, as amended, stand part of the
Bill.
Mr.
Gauke: I have a brief question about drafting, which
applies elsewhere. Subsection (6) states
that: “Before
making a supplemental property transfer instrument the Bank of England
must consult...the FSA, and...the
Treasury.” As
far as I can see, there is no real guidance about what is supposed to
flow from that. I query whether the wording should be
“notify” rather than “consult”, because
it is not clear what the FSA and the Treasury are being asked, and how
the Bank of England should react to any responses received from them.
Can the Minister outline how he sees that aspect working and why
“consult” rather than “notify” is
used? 12.30
pm
Ian
Pearson: We have discussed similar subsections in other
parts of the Bill and at all stages I have been at pains to point out
that the authorities work extremely closely together in these
situations and on the exercise of the special resolution regime. When
we are talking about supplemental property transfer instruments, it is
important that we continue the dialogue among the Bank of England, the
FSA and the Treasury. The word “consult” is right rather
than “notify” when we expect discussions to take place.
In the normal way in which these events are handled, we would expect a
close consultation not just on transfer instruments, but far more
broadly. Question
put and agreed to.
Clause 39,
as amended, ordered to stand part of the Bill.
Clause 40
ordered to stand part of the
Bill.
Clause
41Temporary
Public Ownership: Property
Transfer Amendment
made: No. 97, in
clause 41, page 19, line 4, leave
out subsection (4).—[Ian
Pearson.] Clause
41, as amended, ordered to stand part of the
Bill.
Clause
42Restriction
of Partial
Transfers
Mr.
Gauke: I beg to move amendment No. 144, in
clause 42, page 19, line 26, after
‘include’, insert ‘any’.
This is a
minor drafting amendment seeking greater clarity. I do not want to
stray into the wider issues on clause 42, which are substantial. The
amendment speaks for itself but I do not consider it vital. If the
Minister has anything exciting to say about it, I am sure the Committee
will be pleased to hear it, but I am happy to proceed to the stand part
debate.
The
Chairman: Do I take it that the amendment is not
moved?
Question
proposed, That the clause stand part of the
Bill.
Mr.
Gauke: We finally reach clause 42, which is at the heart
of many concerns about the Bill. To some extent the clause needs to be
looked at together with clause 43. For these purposes, I shall make one
or two introductory remarks. We recognise the
advantages—
The
Chairman: Order. Given that the amendment has been
withdrawn and there is no amendment tabled for clause 43, I am content
to take stand part debates for both clauses together, if that
helps.
Mr.
Gauke: I am happy with
that.
The
Chairman: Fine. Let us do
that.
Mr.
Gauke: I am grateful. My introductory remarks consequently
apply to both clauses. Partial transfers are important to the manner in
which the Bill is designed to work. They enable a bank to be split,
with some assets and liabilities in one entity and the remainder in
another. Essentially, we are left with what could be described as a
good bank and a bad bank.
My hon.
Friend the Member for Wellingborough eloquently set out his objections
to the term “toxic assets” and the Minister tended to
agree. None the less, there is one bank that is much more commercially
attractive and therefore more likely to be acquired by a private sector
purchaser, leaving another entity that will contain assets which, to
put it kindly, will carry a degree of uncertainty. At a practical
level, we have already seen the use of partial transfers in the case of
Bradford & Bingley, Heritable and Kaupthing. We will return to
those cases, although I know the Minister is keen not to be drawn too
much on the subject.
Although the
provisions relating to partial transfers are helpful in trying to
address some of the difficulties with a failing bank, they are also the
area that has caused most concern. Those of us in the Committee who
heard evidence from the British Bankers Association and the London
Investment Banking Association at the beginning of the process will be
well aware of concerns that without sufficient safeguards, partial
transfer provisions may have serious implications for the
competitiveness of London banks.
I know that
the Government recognise some of those concerns. Indeed, the
consultation paper published last week highlighted a number of matters
raised by stakeholders, including increased cost of capital for UK
banks, higher regulatory capital requirements, potential evasion by
counterparties, the likelihood that UK banks will seek to restructure
their arrangements to ensure that partial transfers cannot easily be
applied to business, and the ultimate possibility that all those
factors might have adverse effects on UK financial
effectiveness.
Sir
Peter Viggers: In supporting the thrust of my hon.
Friend’s arguments, I remind him that the BBA said in a
statement that its strong preference was for the special resolution
regime element of the legislation, or at least the part dealing with
partial transfers, to be deferred pending a much more detailed analysis
of the cost and risk factors arising. In evidence before the Treasury
Committee in July this year, the Governor of the Bank of England
emphasised that it was far more important to get the SRR legislation
right than to rush it according to a fixed timetable. I support the
points that my hon. Friend is making.
Mr.
Gauke: I am grateful to my hon. Friend, who anticipates my
comments and raises an important point. If there is one part of the
Bill and the surrounding legislative framework that we need to get
right, it is the safeguards provided here. My argument today will
stress that, highlight the concerns and examine how the Government seek
to reassure. I do not deny that the Government are aware of the issue
and are seeking to address it. The Committee needs to examine in some
detail whether they have succeeded.
The question
is whether the Committee is in a position to make that assessment,
because work is still very much in progress. The various methods by
which the Government seek to address the issue—the safeguards in
secondary legislation, and the code of practice—are at various
stages of development and are not necessarily
complete.
Mr.
Bone: My hon. Friend is introducing the amendment with his
usual clarity, but one thing troubling me about the debate is the fact
that in many cases, we are dealing with matters of which we have no
knowledge. The situation is uncertain. We are in uncharted waters.
However, in respect of partial transfers, we are not, because we have
seen the examples of Bradford & Bingley and the Icelandic banks.
Does my hon. Friend think that the Government are being fair in not
being prepared to discuss those partial transfers in detail so that we
have practical evidence of what
happened?
Mr.
Gauke: My hon. Friend makes a valuable point. We have such
experience. The Government have experience of how partial transfer
works, and that is clearly guiding them, whether with concrete examples
of problems that have arisen in the course of those transactions or
through something less direct that has none the less been provoked and
inspired by them. It is probably helpful to the Government, in
assessing whether they are getting legislation right, to have gone
through the experience of Bradford & Bingley, Kaupthing and
Heritable, but it would be useful if the Committee could benefit from
that experience as well. I encourage the Minister to be as open as
possible with the Committee about the issues that have arisen from
those
cases. I
return to the concerns raised by outside bodies, particularly the BBA
and LIBA. Essentially the concern relates to the cherry-picking of
assets and liabilities so that the good bank gets what is commercially
the best for it, leaving the bad bank with the more difficult assets
and liabilities. The creditor is therefore left with a divide between
the various assets and liabilities, which makes netting and set-off
very difficult. It cannot be sure whether it can net or set off its
assets, liabilities and contractual positions, which creates a great
deal of uncertainty and increases its credit risk and its insolvency
risk for counterparties dealing with British banks.
That will
ultimately increase the cost of capital for British banks and reduce
liquidity. That could have a long-term impact on the UK banking sector.
The Treasury consultation document refers to the fact that the UK has a
competitive advantage in this area. English law is attractive to
creditors in such circumstances and that competitive advantage could be
lost. That is perhaps a relatively cheery way of putting it. The fact
is that we could be left with a competitive disadvantage if we get
this wrong. The safeguards that we are debating in the context of
clauses 42 and 43 are, therefore, very
important. I
should like to raise one point about the architecture of these clauses.
Clause 43 appears to a large extent to be a subset of clause 42. Both
clauses refer to the fact that the Treasury may, by order, restrict the
making of partial property transfers. It is clear what the different
areas covered are. Clause 43 relates specifically to issues of netting
and set-off, security interests, structured finance and so on. This is
not a major point, but would it be possible to deal with all this under
one clause? What is served by the separation of the clauses?
Clause 42
gives the Government power to make regulations limiting the scope of a
partial transfer. Last week when I intervened on the Minister to ask
whether the safeguards relating to partial transfer would be retained
in the code of practice or the secondary legislation, he
said: “The
stakeholders we consulted this year have been very much of the view
that they want the safeguards in secondary legislation, rather than in
the code. We have taken that to heart, which is why we have produced
the consultation document. It is right that those safeguards are
enshrined in secondary
legislation.”——[Official Report, Banking
Public Bill Committee, 6 November 2008; c.
366.] We
will come on to the safeguards relating to netting and set-off, which
the Government propose to address in secondary legislation. With regard
to partial transfers however, they say in the consultation paper that
although they have the power to make regulations limiting their scope,
they do not intend to so in secondary legislation. They intend to do so
within the code of practice. I should be grateful if the Minister could
confirm that that is the case and explain why the Government do not
intend to make regulations limiting the scope of partial
transfers. 12.45
pm Within
the consultation process three scenarios were set out as the possible
scope of a partial transfer. The first was a transfer of the deposit
book only, to ensure protection and continuity of service for
depositors. The second was a transfer to facilitate a pre-agreed
private sector purchaser resolution, and the third was a transfer to
sanitise the balance sheet of a failing bank by separating good and bad
assets. The Government have said that in the light of recent
transfers—we come back to the point about Bradford &
Bingley, Heritable and Kaupthing—there needs to be flexibility.
They argue that the three scenarios set out a while ago do not provide
sufficient flexibility, and highlight how Bradford & Bingley
required the transfer of related assets such as branches and systems. I
understand that, but it seems that it would be perfectly possible, in
the light of the recent experiences, to look again at the issue of
scope and to amend definitions, so that when we refer to the deposit
book we also include related branches and systems. We can return to the
scenarios with a view to redrafting them to incorporate those things,
and also perhaps to making them more flexible. Nevertheless, that could
be done in secondary legislation. I do not see why the recent cases
suggest that that cannot be done, and I would be grateful if the
Minister would discuss
that. It
would also help if the Minister could give us his assessment of how the
Banking (Special Provisions) Act 2008 applies. I know that he will
write to the Committee comparing the provisions in the 2008 Act
with those in the Bill, and that will help. Will he outline how, with
the benefit of hindsight, he sees that the 2008 Act provisions are
flawed or inadequate, or fail to address the circumstances that may
arise? We have some experience of that—as my hon. Friend the
Member for Wellingborough made clear—and it would help the
Committee to know what the role of the existing provisions is, and why
the provisions in the Bill will be of
benefit. I
now turn to Bradford & Bingley. I know that the Minister is not
particularly keen to address this matter, but, having experienced the
splitting-up of that bank, what is his assessment of the cost of
transferring the deposit book to Abbey Santander? What is his
assessment of the value of the residual bank, which is essentially the
mortgage book still held by Bradford & Bingley? I and my right hon.
Friend the Leader of the Opposition visited the offices of Bradford
& Bingley last month, and discussed the events involving the bank
with staff and management. I would be grateful if the Minister could
say where we are with Bradford & Bingley, and whether the
Government have made any assessment—this comes back to a point
made by my hon. Friend the Member for Wellingborough a week or so
ago—of the value of the residual bank. Although we talk about a
good bank and a bad bank, the bad bank tends to have assets that are
uncertain. Where does the Minister see the taxpayer with regard to the
part of Bradford & Bingley that has been taken into public
ownership? It still has a substantial mortgage book; as mortgage
holders come off their deals, they may be unable to find an alternative
deal in the current circumstances and so go on to a standard variable
rate. In those circumstances, Bradford & Bingley may prove
profitable. I raise the question because it will give us a better
understanding of how splitting good and bad banks may work, as a bad
bank can do rather well—a point made by the hon. Member for
South Derbyshire.
May I raise a
question about subsection (3), which seems strange? I do not know what
it is meant to do, and it would help if the Minister were able to
provide some guidance. It
states: “Provision
under subsection
(2)”— orders
that the Treasury may
make— “may,
in particular, refer to particular classes of
deposit.” One
senses that the draftsman has something in mind, but it is not clear to
the Committee what it is. It would be helpful to
know. I
have already mentioned netting and set-off. Again, I refer the
Committee to the evidence received from BBA and LIBA. In essence, they
were concerned about the possibility of partial transfer—that a
bank or a counterparty would be unable to get a clean, unqualified
legal opinion that it could net-off for proper risk purposes. It would
therefore have to account on a gross basis for the capital against
credit risk. As I said, the Government recognise that concern, and I
have cited paragraph 2.4 of the consultation paper.
Clause 43
provides for orders to be created to provide protection. I understand
that the secondary legislation structure has evolved in recent months
and days. Originally, there would have been a safeguard to ensure that
netting assessments could occur for qualifying financial contracts.
That proposal was contained in the special resolution regime
consultation, but it did not get a particularly favourable response
from the industry.
The next
proposal was put to the expert liaison group, which met on 31 October.
It was that the safeguards would be based on industry master netting
agreements. The difficulty with that, identified by the expert liaison
group, was distinguishing between an amended industry standard and a
bespoke agreement, as a result of which there would be a degree of
uncertainty and a potential for evasion.
As the
Government propose again to use secondary legislation, all contracts
that contain any kind of netting provision will benefit from
protection, subject to specific carve-outs. The carve-outs are crucial.
The level of protection will depend upon them. Broadly, they will
consist of the following. First, it deals with contracts governed by
foreign law. I can tell the Minister that paragraph 2.11 of the
consultation paper contains an erroneous “not” in the
first line—either that or I misunderstand it. It covers
contracts governed by foreign laws, which is why clause 36 is
significant. We request clarification on contracts governed by foreign
law, and what foreign property means.
The second
carve-out is debt securities issued by the failed bank. The third is
claims that are crucial to the preservation of banking security. It is
clear from the draft order that it would include retail deposits,
mortgages and other loans, and liabilities other than financial
securities in the ordinary course of
business. The
final carve-out deals with liabilities that constitute some or all of
the counterparty’s claims against the bank, which
seems reasonably uncontentious, given that it would favour the
counterparty. However, paragraph 2.15
states: “The
Government will also consider adding other carve-outs that may be
necessary to ensure sufficient flexibility, while still delivering
sufficient certainty to the market. Consultation responses on this
point are being
sought.” Hon.
Members have noted that great uncertainty remains about how that will
work. The structure for providing protection depends on what the
carve-outs are, and if they are too broad, or if we do not know what
they will be, it will be very difficult for us to assess whether the
level of protection provided is sufficient. That remains a
concern. In
paragraph 2.16, the Government state that
their “clear
intention is to protect contracts relevant for regulatory capital
purposes from the threat of disruption under a partial transfer.
Therefore this consideration will outweigh any of the carve-outs listed
above.” Clearly,
that is designed to provide some comfort and help to the banking
industry, which is to be welcomed, but we have two concerns. First,
that wording is not contained in the secondary legislation, as far as I
can see. Although it is helpful to see it in the consultation paper, it
is not replicated in the draft order. Will the Minister explain
why? Secondly—this
point has been raised by the BBA—there is a risk of circularity.
Under certain circumstances, it is a precondition for netting
arrangements to be recognised in the regulatory capital calculations.
That would be legally enforceable. If legal enforceability depends on
whether an arrangement is recognised for capital purposes, we find
ourselves in a circular position. That is not say that the thinking
behind paragraph 2.16 is not welcome, but given the circumstances it
might raise, we should not be too complacent in making arguments about
the carve-outs and saying, “It doesn’t really matter,
because as long as we have paragraph 2.16 it is fine.” There
might be an issue of circularity.
To be fair,
this point is in the consultation paper, but I would be grateful if the
Minister could clarify that it is not the Government’s intention
that only contracts for regulatory capital protection purposes will be
protected. We should pursue providing protection to all contracts
containing netting provisions without a carve-out. That might provide
the greatest certainty. That is discussed in paragraph 2.25, which
says: “the
Government believes that such an approach...would be too
restrictive”, and
essentially would mean that
a “partial
transfer could only be executed solely on the basis of transferring
property ‘counterparty by
counterparty’.” It
would help the Committee if the Minister could explain how the issue of
netting and set-offs was addressed with regards to Bradford &
Bingley, Kaupthing and
Heritable. Was it done on a “counterparty by counterparty”
basis? What does the Banking (Special Provisions) Act 2008 allow
for? | 
