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.
5
pm 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. The
hon. Gentleman also asked why the Government are consulting on making
provisions for general restrictions in the code of practice rather than
in legislation. As he noted, the Government agree that key safeguards
to partial transfers should be put in secondary legislation.
That is why we are consulting on putting in secondary legislation the
safeguards to protect set-off and netting, to protect security
interests and to aim to ensure that no creditor be worse off through a
partial transfer. Feedback from stakeholders, as the hon. Gentleman
noted earlier, is that those three safeguards, and in particular the
protection of set-off and netting, are the most important, and we
intend them to be covered through secondary legislation. However, as he
is aware, we are consulting on providing additional guidance in the
code of practice on what property, rights and liabilities could be
transferred in a partial transfer and in what circumstances such
partial transfers would
occur. 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. 5.15
pm 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. I
want to return to the question of whether we are rushing this too much.
I of course agree that partial transfers are critical and that it is
therefore essential to
get them right. That is why we have published the consultation document
and why we have set up the expert liaison group to consider the
safeguards. The consultation document, as I have made clear, included
draft orders on the safeguards that stakeholders have informed us are
the most important. Annex A of the consultation document provides draft
secondary legislation for the set-off and netting arrangements and
security interest safeguards in addition to draft regulations for the
“No Creditor Worse Off” safeguard. I would also like to
point out that the adopted approach for the netting and safeguards
follows a direct recommendation from the expert liaison
group. 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.
| 
