Banking Bill

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Clause 52

Valuation Principles
6 pm
Mr. Gauke: I beg to move amendment No. 115, in clause 52, page 24, line 26, at end insert—
‘(e) to act fairly’.
The Chairman: With this it will be convenient to discuss the following amendments: No. 116, in clause 53, page 25, line 31, at end insert—
‘(7) A resolution fund order and any action taken as a consequence of subsection (3) must be consistent with fairness.’.
No. 118, in clause 55, page 26, line 35, at end insert—
‘(d) to be determined fairly.’.
Mr. Gauke: Indeed it is convenient to consider these three amendments together. They all stem from representations that we have received from the BBA, which can be simply described as representing the desire for a fairness test in the provisions relating to valuation. Amendment No. 115 is to clause 52, relating to valuation principles. Subsection (2) states the valuation principles that will apply and that the independent valuer must take into account. The principle suggested by the amendment is that the independent valuer acts fairly. Clause 53 relates to the resolution fund. The proposal in that regard is that a resolution fund order and any action taken as a consequence of a resolution fund order or a discretionary power conferred by such an order must also be consistent with fairness. Amendment No. 118 relates to the making of regulations that provide for compensation to be paid. Again, in the list of various factors to be determined, the compensation levels should be determined fairly.
The intention behind the amendments is to elicit some comments from the Minister about fairness. He may well say that the amendments are not necessary and are otiose—that is a splendid word and I congratulate him on being the first member of the Committee, as far as I know, to use it in these proceedings. None the less, concerns have been raised by outside bodies, including the BBA, about the valuation principles and the way in which compensation will be paid. There is a question of fairness. One difficulty that I can acknowledge is that what is fair to one person is not necessarily fair to another. It does not provide a great deal of certainty. None the less, it is an important principle and I would be grateful for the Minister’s comments on whether he would be willing to incorporate a fairness test in some of the provisions.
Ian Pearson: I regard fairness as extremely important. In fact, it runs through the Labour Government’s policy. I am a little surprised that the outside bodies that have been advising the hon. Gentleman think it necessary to probe in this area and seemingly doubt both the Government’s good intentions and the fact that the European convention on human rights will apply to the circumstances that we are discussing.
Clause 52 sets out the valuation principles that may be required to be specified in any compensation scheme order. In summary, the clause allows the Government to include in a compensation scheme order a number of valuation principles. Those may cover a range of issues, including the method of valuation, whether certain matters should or should not be taken into account by the valuer and whether the valuer may make particular assumptions in carrying out his functions, such as the assumption that the bank is unable to continue as a going concern. The aim of the provisions is to allow the Government to set out the principles that they believe should be adhered to in assessing any compensation. Parliament can of course debate those, as the draft affirmative resolution procedure applies to compensation scheme orders, as I previously outlined.
One specific valuation principle that is required to be taken into account by the clause is that in determining an amount of compensation an independent valuer must disregard actual or potential financial assistance provided by the Bank of England or the Treasury. That is to ensure that taxpayer support does not artificially inflate the value of the failing bank. I know that the hon. Members for Southport and for South-East Cornwall have put forward an amendment on that principle, which we will debate in a few moments.
The purpose of the first amendment from the hon. Member for South-West Hertfordshire is to allow the Treasury in the compensation order explicitly to require the independent valuer to act fairly. I would like to reassure the hon. Gentleman that the independent valuer is already required to act in just such a manner. The independent valuer will be making an assessment of compensation, which will involve the determination of a civil right. As a result, the independent valuer will have to act fairly, in accordance with article 6 of the human rights convention, which requires a standard to be put in place to ensure a fair process for making the determination of compensation. I should also note that the valuer will also be performing a public function and will have to act fairly in accordance with the principles of public law.
The hon. Gentleman’s second amendment is intended to require the resolution fund to be consistent with the principle of fairness. Again, standards of fairness as defined under human rights law will need to be met in any event, in the making of resolution fund orders by the Treasury and the taking of action under such orders by any of the public persons specified in clause 53(3). A resolution fund order is intended to provide compensation to the transferor for the expropriation of property and that compensation must be at least sufficient to meet the requirements of article 1 of the first protocol of the European convention on human rights on the protection of property rights. Fairness is an important principle in ensuring that interferences with property rights are compatible with article 1. As I have explained, the assessment of compensation is also a civil right for the purposes of article 6.
The hon. Gentleman’s final amendment is to clause 55, which provides for the “No Creditor Worse Off” safeguard on which the Government are consulting, as I have mentioned. My understanding is that the purpose of the amendment is to require the determination of third party compensation to be made in a fair manner. Public law will still require the determinations to be made in a way that takes account of all relevant factors and is not considered irrational or arbitrary. Therefore, again, the concept of fairness is implicit in the Bill and in the orders that may be made under powers conferred by the provisions of the Bill. Therefore, in each of these clauses there is already a strong requirement for fairness, in both the outcome of the compensation determinations and in the procedure that must be put in place to determine any outcome, by way of the European Court of Human Rights requirements or through public law requirements, or both. I hope that the explanations have reassured the hon. Gentleman and those who follow these matters that the clauses already deliver the intention of his amendments.
It is, I suppose, possible to argue that the concept of fairness should be explicit rather than implicit, but I do not agree with that. The hon. Gentleman’s amendments, which introduce a requirement for fair treatment, suggest that a different standard of fairness than is usually regarded under the convention rights or public law should apply. I do not believe that that should be suggested. Parliament and the courts have already determined the appropriate standard of fairness, which these clauses comply with, so it would be unhelpful to suggest that the provisions of the Bill should seek to meet a different standard. I hope that I have demonstrated why the amendments are unnecessary and that the hon. Gentleman will withdraw them.
Mr. Gauke: I shall resist the temptation to query the Minister’s statement that fairness runs through the heart of the Labour Government; we will leave that for another day. To address his comments, there appears to be a slight tension or inconsistency in his explanation. He argues on the one hand that the provisions are unnecessary because fairness will be part of the process, and on the other that the provisions would confuse matters by applying a fairness test different from that which exists elsewhere in the legislation. It is difficult to argue both. None the less, I am grateful for his comments that fairness is there implicitly, if not explicitly. I can see difficulties with including an explicit fairness test in the legislation, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Colin Breed (South-East Cornwall) (LD): I beg to move amendment No. 72, in clause 52, page 24, line 28, leave out from ‘must’ to end of line 31 and insert
‘take into account such financial assistance provided by the Bank of England or the Treasury as would have been likely to have been provided to the bank if the SRR powers had not been invoked.’.
This is the third of a suite of amendments highlighting the vulnerability of the legislation in dealing with banks and financial institutions before their insolvency. We have considered the matter in debate on amendments concerning the objectives and the exercise of powers; the valuation principles are the third area.
The amendment, which stands in my name and that of my hon. Friend the Member for Southport, is in effect a direct negative of the clause’s current wording. I suppose that, to a certain extent, the issue goes back to the fairness that we just discussed. It is interesting to ask to whom we are being fair. One hopes for fairness across the board, but the thrust of the legislation is to protect depositors, which implies that the fairness, if there is any, is more fair to depositors than to others. If that is the case, in order to protect the interests and property rights of shareholders, creditors and others, and to ensure that they are not prejudiced or treated unfairly by the clause, we need to protect the residual value of the business and the entity.
The amendment is particularly relevant to the extent that the Bill retains the prospect of banks entering into the SRR regime before they have reached a state of insolvency as it is generally understood in law. It is that period that we have highlighted on several occasions. Once someone has gone into insolvency, there are clear rules about how things will happen, but in the period before that, a number of subjective judgments must be made about timing, objectives, principles and so on, all of which can be incompatible with each other to a certain extent.
However, we believe that the aim should be to make those valuation judgments consistent with an orderly run-off or wind-down of the business. Sometimes it is right for the authorities to support and create that rather than the “crash bang wallop” approach of going straight into insolvency. If that is the case, when valuation principles and compensation are being considered, it is right at least to consider what might be available from the Treasury and the Bank of England.
However, the clause currently excludes all that. I can understand why the Government would want to exclude it, but I am not certain that that sits easily with the objective of treating everyone fairly. Bearing in mind that the process could immediately precede an ultimate insolvency, it is rather contradictory to what would normally happen in the event of a full-scale insolvency. This is a probing amendment. It is for the Minister to explain and justify the clause to which we have tabled the amendment.
6.15 pm
Mr. Gauke: I note that the hon. Gentleman described this as a probing amendment. We would not be inclined to support it; it is right that financial assistance should be disregarded by the independent valuer; otherwise, a public subsidy will essentially end up in the hands of shareholders and creditors. We believe that that would be wrong. However, there are two points in subsection (3) where greater clarification would be helpful.
The first is the fact that the independent valuer has to disregard potential financial assistance. I am not sure what potential financial assistance is, and how the independent valuer is supposed to disregard it given that it will not have happened. Secondly, the carve-out disregards ordinary market assistance offered by the Bank of England on its usual terms. It would help if the Minister were to elaborate a little on what ordinary market assistance is, so that we are clear as to what is ordinary and what financial support should be disregarded.
Ian Pearson: The amendment seeks to remove the principle that the independent valuer must disregard any financial assistance provided to the failing bank by the Bank of England and the Treasury. Although I appreciate the probing way in which the amendment was moved, it would have fundamental consequences. We cannot agree to it, as it would remove a core principle of the compensation provisions, which is that compensation should not be paid for the value of a bank as artificially inflated with the investment of public funds. If public funds have been invested, it is right that they should be discounted in subsequent evaluations. If taxpayers’ money has been invested in a bank in order to support it, the failing bank or its shareholders should not benefit through the compensation. To allow that to happen would be against the Treasury’s duty—and, indeed, the SRR objective of protecting public funds, as outlined in clause 4.
The hon. Member for South-West Hertfordshire asked about potential financial assistance. Financial assistance provided on an ongoing or continuing basis would be potential financial assistance. That probably clarifies the hon. Gentleman’s query.
On the broader point, however, there is a matter of principle. I cannot agree with an amendment that suggests, when it comes to subsequent evaluation, that we should disregard any amount of money that the Government or the Bank of England have put into a bank that subsequently gets into difficulties. That would be wrong, and it would not be accepted by the wide generality of taxpayers. I hope that the hon. Gentleman will withdraw the amendment.
Mr. Breed: As I said, it was a probing amendment. We moved it because we needed clarity. To an extent, the matter of compensation is already a problem in certain circumstances—for instance, in respect of Northern Rock. Having put that on the record, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 52 ordered to stand part of the Bill.

Clause 53

Resolution fund
Ian Pearson: I beg to move amendment No. 110, in clause 53, page 25, line 8, at end insert—
‘(2A) A resolution fund order may include provision for—
(a) an independent valuer to make a determination under the order (in which case sections 49(2) to (5), 50 and 51 shall apply);
(b) valuation principles to be applied in making a determination (in which case section 52(2) shall apply).’.
Clause 53 makes provision in respect of bank resolution fund orders. A bank resolution fund is mandatory following a transfer of a failing bank’s property to a bridge bank and optional when a bank is taken into temporary public ownership. Such a compensation procedure ensures that the failing bank or, in the case of temporary public ownership, its shareholders have a contingent economic interest in the proceeds of the resolution.
The bank resolution fund demonstrates that the Government do not have an economic interest in the bridge bank and that they do not intend to profit from any uplift in value arising from the stabilisation. Rather the authorities’ only aim in acting is to meet the SRR objectives. As I indicated, I do not believe it necessary to have a bank resolution fund following a transfer to a private sector purchaser, because in such circumstances the proceeds of resolution flow directly back to the failing bank or its shareholders. The Treasury should have the discretion not to put in place a bank resolution fund when a bank is taken into temporary public ownership, because in some circumstances—for example, if a significant amount of public funds has been invested—it is appropriate for the public to benefit from the upside of any resolution.
On reflection, even though the bank resolution fund method does not require the undertaking of a valuation exercise to assess the compensation due, the Government recognise that in certain circumstances the appointment of an independent valuer will be appropriate. For example, it might be appropriate to appoint an independent valuer to consider whether the actual sale price provided a reasonable relation to the market value. The amendment thus allows the Treasury to appoint an independent valuer and to put in place, alongside that, certain valuation principles to be used in conjunction with the bank resolution fund.
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