Clause
52Valuation
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
53Resolution
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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