Banking Bill

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The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, † Mr. Jim Hood, Mr. Eric Illsley

† Barlow, Ms Celia (Hove) (Lab)

† Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)

† Bone, Mr. Peter (Wellingborough) (Con)

† Breed, Mr. Colin (South-East Cornwall) (LD)

† Eagle, Angela (Exchequer Secretary to the Treasury)

† Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)

† Gauke, Mr. David (South-West Hertfordshire) (Con)

† Hoban, Mr. Mark (Fareham) (Con)

† Hosie, Stewart (Dundee, East) (SNP)

† Keeble, Ms Sally (Northampton, North) (Lab)

† Newmark, Mr. Brooks (Braintree) (Con)

† Pearson, Ian (Economic Secretary to the Treasury)

† Pugh, Dr. John (Southport) (LD)

Robertson, John (Glasgow, North-West) (Lab)

Smith, Geraldine (Morecambe and Lunesdale) (Lab)

† Todd, Mr. Mark (South Derbyshire) (Lab)

† Viggers, Sir Peter (Gosport) (Con)

† Wilson, Phil (Sedgefield) (Lab)

Alan Sandall, Mick Hillyard, Celia Blacklock, Committee Clerks

† attended the Committee

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Public Bill Committee

Tuesday 11 November 2008

(Afternoon)

[Mr. Jim Hood in the Chair]

Banking Bill

Clause 42

Restriction of Partial Transfers

Question proposed [this day], That the clause stand part of the Bill.

4.30 pm

Question again proposed.

The Chairman: I remind the Committee that with this we are taking clause 43 stand part.

Mr. Gauke (South-West Hertfordshire) (Con): I welcome you back, Mr. Hood. It is a pleasure to serve under your chairmanship. Before we adjourned earlier today, my hon. Friend the Member for Wellingborough raised an issue that I endorse. He said that it would be helpful, when discussing the issue of partial transfers, if the Government would give the Committee the benefit of their experience of the partial transfers that have already occurred under the existing regime of the Banking (Special Provisions) Act 2008—that is, in respect of Bradford & Bingley, Kaupthing and Heritable.

Another issue addressed in the Treasury consultation paper on safeguards for partial property transfers published last week relates to security interests, which are the interests the lender has in the property collateral of the party to whom they have lent on a secured basis. This has been an area of concern, in that the provisions could result in disruption and make it difficult for the security holder to enforce security, which would set London banks at a competitive disadvantage.

The special resolution regime consultation proposed the transfer of all liabilities to the new company with the related collateral or not at all. Concerns have been raised that the proposal may limit flexibility from the Government’s perspective because of floating charges. The Government have clearly considered how floating charges should be addressed and, as I understand the position, they have decided not to go for maximum flexibility but to provide some certainty and security. We welcome that, but I should be grateful if the Minister could confirm the approach set out in the consultation paper and elaborate for the Committee’s better understanding the Government’s thinking in that area.

I understand that the safeguard will restate the legal requirement to respect the integrity of security interests covered by the financial collateral directive. Will the Minister give the Committee some guidance as to whether it should be the financial collateral directive or the regulations made under it for the purposes of UK law—the Financial Collateral Arrangements (No. 2)

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Regulations 2003? I believe that they are wider than the directive. It would be helpful to know whether any consideration was given to using the regulations rather than the directive as the basis for these provisions. Were any considerations given to the use of secondary legislation referring to regulations rather than the directive? The draft statutory instrument refers to the directive rather than the regulations.

Another issue has come up with regard to structured finance. Again, the Government are keen to ensure that there is no disruption to structured finance arrangements and we welcome that. There is nothing on that point in the draft order, which seems to be at an early stage, so it is difficult for the Committee to discuss the provisions at great length or in detail, although we welcome the principles guiding the Government’s action.

As I stated this morning, it is vital that the safeguards in place as a consequence of clauses 42 and 43 are effective, to protect the competitive position of London banks. However, I should like to highlight one area where we are not in a position to assess the status of the proposed legislation and proposed secondary legislation—enforcement. What happens if things go wrong? If a transfer falls within a class prohibited by the order—currently the draft restriction of partial transfers order—what will happen? We have to look at regulation 6(5) of the draft order, which at the moment merely states in square brackets:

“The steps are to remedy the breach identified in the notice.”

Perhaps the Minister can provide some clarification about exactly what steps will be taken to remedy any breach, because that is important and it is necessary to ensure that partial transfer takes effect to produce a result that is not incompatible with the relevant safe harbours, which we spent some time discussing this morning. If something is in a safe harbour, it is important that it is properly protected and that the harbour is safe.

That is another example of our being somewhat short of details. The document published last Thursday is helpful; there is some indication of movement in the right direction in the view of industry bodies that have been concerned about the proposals, particularly the idea of moving away—in the context of netting the set off—from master netting agreements to incorporate bespoke agreements, which seems to have a lot to be said for it. However, there are still a large number of areas where the drafting is at an early stage or non-existent, which makes it difficult for the Committee to debate the provisions as effectively as we should do.

The matter is at the heart of the concerns raised by outside bodies about the competitiveness of the UK banks, yet we are having to consider it without knowing where we shall end up, because the key parts are not clauses 42 and 43—no amendments of any substance have been tabled or proposed for those clauses—but relate to secondary legislation that is at draft stage. Although things have moved considerably since the first meeting of the expert liaison group on 31 October, the document, from which I have quoted at some length today, was published only last Thursday so industry groups may not have had an opportunity to digest all its finer detail and to convey their thoughts to Committee members.

I return to a point made by my hon. Friend the Member for Gosport at the beginning of the stand part debate: whether the Government should consider the

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proposal made by the London Investment Banking Association, among others, that the provisions relating to partial transfers be implemented at a later date to ensure that we get them right and that we do not fall into some of the difficulties that the Government themselves recognise. I raise the matter not in an attempt to push the Government into a corner—far from it—but to urge the Minister at least not to rule out that possibility, because although we are debating something important today, it is not clear what we shall end up with.

I do not want overly to anticipate our debate on clause 65. However, outside bodies are looking for assurances about greater certainty in this area, and clause 65, which enables the Government to change the statute by statutory instrument, undermines that certainty. That has to be taken into account when we consider the package as a whole.

The Government are moving in the right direction, although concerns remain about the provisions we have, and even greater concerns about those we do not have. I therefore urge the Minister to do all that he can to address them, or at least to be prepared to take this aspect of the Bill in a steadier way, without jeopardising the implementation of the Bill as a whole, so that we get this area of legislation right.

Mr. Peter Bone (Wellingborough) (Con): We have reached what is perhaps the most controversial part of the Bill. Against the backdrop of the current economic crisis, we may have a tendency to rush through the clauses on partial transfer. We are moving against all the rules of the market; the essence of the Bill is not to let the rules of the market apply but to intervene to stabilise the financial situation.

Many people can understand taking a whole bank and nationalising it. They can understand a whole bank being part of a fire sale to the private sector. We have seen that happen in the past and we understand the implications. A fire sale would mean that the shareholders would lose a lot of money, but the creditors would still be ranking in the business. Nationalisation would result in a huge loss to the shareholders but the liabilities would go across with the bank. Creditors who are not depositors will lose out significantly with partial transfer.

I am still struggling to understand how the Bradford & Bingley situation was managed. It would help if we had—even if only for my benefit—an idiot’s guide to the process that the Government went through. They did it in exceptional circumstances and seem to have pulled off something that is generally welcomed, but I am not sure what the outcome will be. In effect, we have two banks: the good bank and the bad bank. The good bank went off to Abbey Santander and the bad bank is left, but I do not know what it is worth.

Under the clauses that we have already debated the Government are allowed to send bad bits back to the rump bank. I do not know whether it is intended that in most cases the rump bank or the bad bank will then go into administration. I am not clear about whether the money from a partial sale to the private sector goes to the original shareholders or whether it is used to pay off creditors in a ranking order. I am not sure about any of these things. Because the detail is left to regulations, we are struggling.

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This is probably the most important part of the whole Bill. We could proceed with the Bill and leave these clauses until a later stage when we have much more detail. The Conservatives want to get the Bill right. It is a measure that we hope no one ever has to use. We are dealing with concepts that are so strange and unusual that more time on these provisions would be most useful. We have already had to deal with default clauses, yet all the things that would normally happen under them are not in the Bill. It would help if the Minister could tell the Committee where we are with the only concrete partial sale that has occurred—albeit some time ago, in relative terms—Bradford & Bingley.

4.45 pm

I am not arguing for the commercial details but for the general principles—the way in which the sale happened, how it occurred, who will get what from where and the likely outcome. A concrete example for dealing with partial sales would help the Committee enormously. I take the point made by my hon. Friend the Member for South-West Hertfordshire: it would be hugely damaging if we got things wrong and there was a feeling in the global marketplace that it was best not to do business in Britain because if something went wrong the business would lose much more than if it were based elsewhere. We hope that the provisions are never enforced—of course, if we have a new Government they never will be enforced because everything will be milk and honey from then on—but I accept that we must look seriously at the possibility of that happening somewhere down the line, in 20 or 30 years. We do not want to lose 20 or 30 years of business because we got one part of the Bill wrong.

Sir Peter Viggers (Gosport) (Con): I recognise the need for the Bank and other bodies working with the Treasury to have exceptional powers to deal with exceptional difficulties. We have a set of circumstances that require the Government to take unusual measures, but it worries me that the rules that we are considering will wipe out all the rules of private enterprise and virtually give the Government an opportunity to start with a clean white sheet of paper on which to write their own plot. Which of the provisions do the Government intend to be temporary and which permanent? Perhaps the Minister will find that question difficult, because he will know, as I do, that the world we go back to in 2012 or 2015, when the current difficulties are over, will not be the world of 2004 and 2006. We will not immediately go back to freedom of credit. If the Minister could essay an answer, I should be grateful for his comments.

The Economic Secretary to the Treasury (Ian Pearson): We intend the Bill to put in place a permanent special resolution regime. We have been clear that there are things that are right and appropriate to put into primary legislation and that other matters rightly should be the province of secondary legislation, which is still permanent but where there is greater ability to make changes urgently. Other things are in the code and will be reviewed from time to time. The debate throughout the Committee stage has been about what is most appropriately put in which box—primary legislation, secondary legislation or a code. I hope that helps the hon. Gentleman.

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Sir Peter Viggers: I am grateful to the Minister. We have had an exchange a bit like this before, when—perhaps as a tribute to my incredibly advanced years—I was harking back to the days when the Bank of England was able to carry out its negotiations and discussions behind closed doors. The Minister pointed out that we have to move on, that we have to recognise that we are in the 21st century and that such outdated practices are no longer possible. I regret that the old idea of the Bank working quietly and privately is no longer possible, because the proposed structure is undoubtedly mechanistic and gives the Government powers that they have never had before.

I express caution on behalf of the banking profession—including the British Bankers Association and others—which is concerned that we should not put permanent legislation in place until a great deal of thought has been given to the overall structure. We are where we are, and we have some way to go yet in the Bill, but I put these comments down as a marker to Government and support my hon. Friend the Member for South-West Hertfordshire in expressing concern about the comprehensive nature of the powers that can be given to Government.

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Prepared 12 November 2008