Banking Bill

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Ian Pearson: I fully appreciate stakeholders’ concerns about the Bill’s partial transfer provisions. We have talked to stakeholders about them on many occasions and, as the Committee will be aware, we have held three rounds of formal public consultation, an extensive series of stakeholder workshops and meetings between February and September 2008, and have published draft clauses from the most complex part of the Bill—the special resolution regime. The most recent round of consultation was about the safeguards on partial property transfers. The hon. Member for South-West Hertfordshire raised many issues that appear in the consultation document. Those who take an interest in our proceedings will have noted what he said, and we will consider fully all the representations that he has made as we seek to refine the special resolution regime safeguards.
The Committee will be aware by now that clauses 42, 43 and 55 and the secondary legislation contain a number of legislative safeguards to protect bank creditors and counterparties in a partial transfer. The Government recognise particularly the importance that market participants attach to netting arrangements and security interests. For example, legal certainty with respect to a netting agreement is vital for risk management. Therefore, in responding to stakeholder concerns, we are consulting on the details of three key safeguards.
First, clause 43 contains a safeguard to protect the set-off and netting arrangements on which so many bank counterparties rely. Secondly, it provides for a safeguard to protect security interests so that creditors with a fixed or floating charge retain recourse to their collateral. Thirdly, clause 55 contains a safeguard that will provide compensation for creditors left in the residual bank, to ensure that they are made no worse off than if the whole bank had been wound up: in other words, had the authorities not intervened.
The safeguards are important and should give market reassurance so that the potential problems alluded to by the hon. Member for South-West Hertfordshire and others will not arise in practice. In addition, the code of practice will set out the types of circumstance in which the authorities would wish to consider a partial transfer. Building on the work done so far, the Government will continue to work with stakeholders to develop the safeguards and the other secondary legislation.
I welcome the comments made by the hon. Member for South-West Hertfordshire recognising that the Government have been listening and continue to engage in dialogue. As he is aware, we have established a new expert liaison group, which will help prepare the secondary legislation on the special resolution regime. On other occasions, I have referred to the process as one of co-production. We want to get it right. The expert liaison group has already provided valuable input on the detailed nature of the safeguards, and the consultation document reflects some of its initial views, but there are a lot more opportunities for the expert liaison group and stakeholders more widely to contribute.
Mr. Gauke: I am grateful to the Minister. It is encouraging that there are a lot more opportunities for the expert liaison group to make contributions. His comments have highlighted the fact that we are at quite an early stage of the process of developing the various safeguards. I know that he said that the Treasury will hear the representations made during the debate, but these proceedings should not be just part of a consultation process. We are the law-makers, yet it seems to me that the law is being made after Parliament has had the opportunity to scrutinise and debate these matters. The consultation seems to be lagging behind Parliament, because we should now be debating something pretty near its final form.
Ian Pearson: I shall say more on the timing in a few moments. However, it is not necessarily abnormal for the Government to seek to pass primary legislation and then to implement secondary legislation later. We are going through the normal procedures of both Houses. On Second Reading, several Opposition Members expressed concern about the time it had taken the legislation to reach that stage. We have very good co-operation with stakeholders, and we want to continue to work with them to ensure that we get the legislation right.
Clause 42 provides the Treasury with a power to place restrictions on partial transfers. Although the Government are not proposing to place broad legislative restrictions on partial transfers, it is still beneficial to include the clause, as I shall explain. The clause provides the authorities with the means to place restrictions on the nature of the partial transfers that they may effect through use of the property transfer powers provided by this part of the Bill. The making of restrictions has the potential to provide bank stakeholders with greater certainty about how the property transfer powers will be used to effect partial transfers. That could be through a particular strict condition, or through a more general restriction on when and how partial transfers would be executed. Given the nature of the powers, stakeholder interest and the technical complexity of the issue, the Government consider it appropriate to take a power in the Bill to provide for restrictions to be made as the authorities deem appropriate. For example, if further consultation with stakeholders reveals a particular facet of partial transfers that the authorities may wish to restrict in order to provide greater certainty to the market, the clause provides the mechanism through which that can be achieved.
As I have already noted, the range of ways in which the authorities may restrict partial transfers is purposely broad. The flexibility reflects the complex range of issues likely to be generated in different bank resolutions. The Government consider it appropriate and desirable for safeguards of this nature to be provided in secondary legislation, rather than in the Bill. Any order made under such a power would need to make provision at a level of detail inappropriate to primary legislation. That reflects the complexity of bank resolutions and of the property, rights and liabilities of banks. It will be important to retain flexibility, including the flexibility to amend or add to the nature of the restrictions placed on partial transfers.
I remind the Committee that the SRR is a new legislative regime. Experience may show that partial transfers should be more or less restricted than initially thought, to respond to continuing market reaction to the powers, or to the authorities developing practical expertise in resolving banks in difficulty. At the very least, the nature of the restrictions will need to be updated in line with innovation in the financial markets. However, in view of the significance of the issues addressed by the power, and in view of the standing nature of the provision to be made, the power is subject to the draft affirmative procedure. In addition, the Government are committed to consulting fully on the key elements of the secondary legislation for the safeguard.
To that end, the Government are consulting on what secondary legislation should be made under clause 42. At this stage, we propose that the power should be used to place restrictions on reverse property transfers. The restrictions are designed to provide certainty to creditors transferred to a bridge bank that they will not be moved back to the residual bank. However, this is not a closed book. Further consultation with stakeholders may determine that further restrictions are appropriate. What is important, however, is that the authorities have the means to put the restrictions in place in an appropriate way, preserving market confidence in the use of the property transfer powers. The clause provides those means.
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Clause 43 provides a key partial transfer safeguard. It provides the Treasury with the power to protect security interests and set-off and netting arrangements. The purpose is to provide protection for private law interests. Secondary legislation made under this power will describe in detail the nature of the interests to be protected and the way in which they are to be protected. The recently published consultation document provides detail on the Government’s proposals.
It may help if I describe the nature of the interests that the safeguard is designed to protect. In broad terms, a security interest is a specific protection, taken by obtaining a property interest in the debtor’s property, against which recourse can be had in defined circumstances—for example, in cases of non-payment. At its most basic, netting is the process whereby multiple contracts are set off against one another. However, netting also involves more complicated arrangements, utilising the basic concept of set-off to manage transactional risk.
For example, close-out netting may allow all the contractual obligations of a party to be terminated on a trigger event and reduced to a single sum, either owed or owing to the counterparty in question. Such cover is often provided under industry standard master agreements, prepared by bodies such as the International Swaps and Derivatives Association. However, counterparties also use a range of bespoke arrangements. Those arrangements are crucial to the functioning of the financial markets, and are an integral part of the way in which counterparties do business with banks. It is therefore important that we get the safeguards right, and that we strike the right balance between the protection that the market needs and the flexibility that it is desirable to retain in order to effect appropriate partial transfers.
The power in clause 43 provides a broad definition of the interests to be protected, which reflects the extremely broad range of interests that exist in that field. The interests that the power needs to address include, for example, security interests granted under foreign legal systems and complicated types of set-off and netting arrangements used in particular types of specialist markets. Protection may be given to such interests in the ways set out in subsections (2) and (3). Again, flexibility is needed to reflect the complexity of the underlying arrangements, and the ways in which protection might be provided. The draft order proposed to be made under the clause is, as I have indicated, the subject of consultation.
The protection to be afforded will, in broad terms, ensure that the integrity of the interest is respected, to the extent provided for in the order. For example, when a series of contracts are subject to a netting arrangement protected by the order, the requirement could be to transfer all such contracts or to leave all such contracts behind, as to transfer some but not all would interfere with the operation of the netting arrangement.
In line with clause 42, the Government propose that the detail of the safeguard should be set out in secondary legislation. That is for two main reasons. First, implementation of the policy will require detailed consideration of complex and varied interests in a variety of market contexts, the detail of which is appropriately addressed in secondary legislation.
Secondly, it is desirable to retain flexibility in order to adjust and refine the safeguard in the light of experience. That is particularly important in this context, because security interests and set-off and netting arrangements have proved to be highly innovative. The latter, in particular, have developed and evolved significantly over a comparatively short period of time. Changes to the safeguard may be necessary to ensure that it continues to protect what it is intended to protect, but also to ensure that innovations do not undermine the policy aims that the special resolution regime is intended to serve.
Draft orders were published in the 6 November consultation document, following discussions with the expert liaison group. The precise nature of the safeguards is subject to consultation. However, at this stage the Government propose a set of broad protections. The Government propose to protect all contracts covered under set-off or netting agreements from potential disruption caused by a partial transfer—apart from a set of clearly defined exceptions. The protection extends to bespoke agreements, in addition to those made under industry-recognised master netting agreements. The Government consider that the safeguard provides the market with a strong and clearly defined protection, while leaving the authorities with sufficient flexibility to carry out appropriate partial transfers.
Mr. Mark Todd (South Derbyshire) (Lab): The balance between the discretion required to exercise the power and the certainty required by someone trading with a bank when trying to reach a long-term commitment is a delicate one.
I have been slightly puzzled by the application in this legislation of the word “may” to the protections to which the Minister has referred. It implies a discretion that allows the Government not to exercise the powers granted to it to protect the various interests to which he refers. Will he clarify the use of that term, because it puzzles me that there does not seem to be an obligation involved to protect the interests he has stated?
Ian Pearson: I am not sure to which “may” my hon. Friend is referring. The policy intention is to provide a strong safeguard that provides protection to bespoke agreements, to agreements made under industry-recognised master netting agreements and to provide, as part of that context, clearly defined protection. This is something that the industry has welcomed and has been asking questions about and we will be responding to the consultation exercise.
Mr. Todd: May I give examples of the use of “may”? Clause 43(3) says,
“an order may apply to arrangements generally or only to arrangements...of a specified kind, or...made or applying in specified circumstances.”
That is rather general, on the lines that those are our broad intents but we can do it another way. The difficulty with uncertainties may be dealt with by clearer guidance which is being discussed now. My concern is that what is on the statute book enshrines a degree of discretion that those lending to a bank or seeking to construct an instrument with a bank might have some anxiety over.
Ian Pearson: I understand the point that my hon. Friend is making. I want to be clear that we are intending to make progress and issue secondary legislation to provide the safeguards that are reflected in clauses 42, 43 and 55, as I have already outlined to the Committee. We think that with regard to partial transfer powers we should outline the principles in the code. My hon. Friend will see the draft legislation that is in the “Special resolution regime: safeguards for partial property transfers” consultation document. I confirm the Government’s intention, following consultation, to proceed with it.
Mr. Bone: Following what the hon. Member for South Derbyshire has said, it is rather important to give certainty in this area as it is the most controversial. The Minister has assured us that it shall happen but I am afraid the Bill says that it may happen. Would it not be worth thinking about whether those “mays” should be turned into definites?
Ian Pearson: I will certainly think about it and talk to officials about the different “mays” and “shalls”. We may consider that changes need to be made to the Bill but, on the other hand, we may not; we may think that our original thinking was correct in this matter.
To conclude on security interests, the Government are proposing that all forms of security arrangement where a creditor takes an interest in the property of the debtor should be protected, including both fixed and floating charges, which was a point raised by the hon. Member for South-West Hertfordshire.
A number of hon. Members requested further information on lessons learned from Bradford & Bingley, as an example of a partial transfer. As I said before we adjourned for lunch, it is inappropriate to discuss the details of current resolutions, not least because of litigation issues. However, in order to help the Committee, let me provide some general reflections on this case and how recent resolutions have informed our thinking on partial transfers.
Using the powers in the Banking (Special Provisions) Act 2008, put in place in February, Bradford & Bingley plc was taken into temporary public ownership by way of a transfer of its securities. Then, as part of the same order, its deposit business and its branches were transferred by way of a property transfer to Abbey Santander, backed by a contribution from the Financial Services Compensation Scheme and the Treasury. The parts of the bank that were not transferred to Abbey—in broad terms, mortgages and other assets—remain in public ownership. That was a relatively simple example of a partial transfer. Under the transfer order, the FSCS paid out approximately £14 billion to enable retail deposits held in Bradford & Bingley and covered by the FSCS to be transferred to Abbey, with the Treasury making a payment to Abbey for retail deposit amounts not covered by the FSCS, amounting to approximately £4 billion.
It may also help the hon. Member for Wellingborough to set out how a partial transfer might work, but I want to stress that this is just one example. The Bank of England could use the bridge bank stabilisation options to transfer a deposit book of a failing bank to a bridge bank. The residual company—that is the banking business not transferred—would enter the bank administration procedure, as provided for by part 3. The residual company would be wound up by a bank administrator, while providing necessary services to the bridge bank. The Bank of England would work to stabilise the bridge bank and sell on to a private sector purchaser as quickly as possible. That is an example of one way that the powers could be exercised in the future.
The hon. Member for South-West Hertfordshire also asked a number of questions about clause 42(3) and our treatment of it in the consultation document on partial transfer safeguards. First, to answer his question on the why subsection (3) refers to classes of deposits: the provision gives an example of the class of property to which restrictions could relate. Subsection (3) does not state that restrictions must necessarily relate to deposits. It is designed to give a flavour of the type of provision the underlying secondary legislation could make.
As I have said, recent events in the financial markets have clearly demonstrated that preserving the flexibility of the authorities is crucial. Therefore, we do not believe that at this stage there should be, in addition to the safeguards that I have just mentioned, a general legislative restriction on the scope of partial transfers. However, the guidelines in the code of practice will give the market more clarity about the nature of the partial transfers that the authorities may effect. However, we are consulting on it and I look forward to receiving stakeholder views on it.
Another issue raised by the hon. Member for South-West Hertfordshire was about paragraph 2.16 of the consultation document. Paragraph 2.16 sets out the Government’s broad policy intention towards set-off and netting arrangements, which is to protect contracts relevant for regulatory capital purposes from the threat of disruption. However, it would not be appropriate for the draft order to adopt a specific definition to that effect, in part due to the circularity point raised by the hon. Gentleman. Instead, the draft order specifies that set-off and netting arrangements will be protected subject to delineated exceptions, which is important so that counterparties can attain the necessary legal certainty. The Government will be working with stakeholders, including through the expert liaison group, to ascertain whether the provisions of the draft order address the policy objective of protective set-off and netting arrangements with rate contracts that are relevant for regulatory capital calculations.
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I want to make it clear at this stage that the safeguard is likely to cover many more set-off and netting arrangements than simply those that relate to contracts relevant for regulatory capital. The broad safeguard proposed would cover most set-off and netting arrangements, subject to some exceptions, and that approach has been welcomed already.
The hon. Gentleman asked what protection is provided for security. I can confirm that the Government are consulting on the position that the security interest safeguard should be comprehensive and include all floating charges. He also asked why we should refer to the financial collateral directive, rather than to regulations, which are wider. It is correct that the draft order only refers to protecting interests under the financial collateral directive, rather than regulations, but we are specifically consulting on that point. I refer the hon. Gentleman to question 10 on page 18 of the consultation document. We are open to representations on that point.
We are making good progress on the detail of those important safeguards, and we want to get them right. We currently believe that, with the good co-operation we have had so far with stakeholders, we will be able to get them right in a timely manner so that we can pass the secondary legislation at a similar time to the passing of the primary legislation we are discussion today.
Question put and agreed to.
Clause 42 ordered to stand part of the Bill.
Clause 43 ordered to stand part of the Bill.
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