Banking Bill

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Mr. Bone: As the day has drawn on, I have been pondering that point in relation to earlier clauses, when the Minister referred to an auction, rather than a sale, to establish the market value and therefore to make an independent valuer unnecessary. However, I am not sure that the sale price will always be the market value, because of the way in which the deal is done. I hope that the Minister is saying that in those cases we would have an independent valuer.
Ian Pearson: I understand the hon. Gentleman’s point, but it seems a little theoretical. If a clear market price is set following an auction process that results in the disposal of part of a failing bank, I cannot see why that price should not be accepted and transacted. Government amendment No. 110 deals with a different case. If passed, it would allow the Treasury to appoint an independent valuer. By allowing us to do that, if we felt it necessary, we would increase the transparency of the calculations within a bank resolution fund and help to ensure the adequacy of the fund for human rights convention purposes. On balance, the amendment should be added to the Bill, so I invite hon. Members to support it.
Amendment agreed to.
Mr. Gauke: I beg to move amendment No. 148, in clause 53, page 25, line 11, at end insert ‘or’.
The Chairman: With this it will be convenient to discuss amendment No. 149, in clause 53, page 25, line 12, leave out from ‘England’ to end of line 13.
Mr. Gauke: Clause 53(3) states:
“A resolution fund order may confer a discretionary function on...a Minister of the Crown...the Treasury...the Bank of England, or...any other specified person.”
Why should we permit a discretionary function to be conferred on any other specified person? What does that provision have in mind? Should not only a Minister of the Crown, or the Treasury or the Bank of England have such a function under a resolution fund order? Amendments Nos. 148 and 149 would remove the reference to “any other specified person”. I should be grateful for the Minister’s explanation why it is necessary to be able to confer discretionary functions on somebody when—from the point of view of the Committee—it is not clear who that person would be, even though he or she would be in a relatively significant position.
Ian Pearson: I provided an explanation of the purposes and reasoning behind clause 53 when we were discussing Government amendment No. 110. The hon. Gentleman’s amendments seek to remove the power under the clause for the Treasury to confer a discretionary function on “any other specified person”. I do not think that is appropriate. The bank resolution fund order may include a role for a number of persons. For example, as the hon. Gentleman indicated, the Bank of England, as set out in subsection (3)(c), will have a management duty placed upon it. The Treasury, under subsection (3)(b), could be required to pay additional compensation if there were a successful challenge that the bank resolution fund had not met ECHR requirements for adequate compensation.
In addition, other persons such as an independent valuer, an independent auditor of resolution costs or a monitor of fees can also play a role in a bank resolution fund, so instead of listing all the persons who may have a discretionary function conferred upon them, subsection (3)(d) of clause 53 allows the Treasury to confer a discretionary function on “any other specified person”. It is an important part of making the clause effective, and I hope the hon. Gentleman will seek leave to withdraw his amendment.
I shall provide a little more detail. Specific functions are conferred on appropriate persons under compensation orders and third party compensation orders. For example, the independent valuer must conduct a valuation exercise to determine what, if any, compensation is payable. An appointing person must appoint an independent valuer and the monitoring person must monitor the remuneration and other arrangements of the independent valuer. The compensation scheme order may also confer functions on appellate bodies to hear an appeal as regards any determination of the independent valuer. As such, it is not necessary to confer any other function on any other specified person. However, in the case of bank resolution funds it is impossible to specify precisely the functions a specified person may have to undertake under the bank resolution fund. A detailed provision in the Bill would be inappropriate. We therefore considered it prudent to take the power to enable the Treasury to confer a function on “any other specified person”. I hope that is helpful in explaining the intention behind the provision.
Mr. Gauke: I will be helpful to the Minister. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Gauke: I beg to move amendment No. 150, in clause 53, page 25, line 20, leave out ‘subserviate it to’ and insert
‘subordinate the requirement to the’.
The Chairman: With this it will be convenient to discuss amendment No. 151, in clause 53, page 25, line 22, leave out ‘its extent’ and insert
‘the extent of the requirement’.
Mr. Gauke: Although I am sure the Committee is united in its belief that otiose is a splendid word, subserviate is not. At least, that is the view on this side of the Committee. I certainly could not find it in the dictionary. My amendment identifies only one use of it but it creeps in not only in subsection (5) but also in subsection (6). If the Minister is inclined to accept amendment No. 150 and change the wording from “subserviate” to “subordinate” the requirement and so on, we will call it a score draw. He can have one amendment and I can have the other. If he is not inclined to do so, I do not know whether I am inclined to press for a Division, but we shall hear what he has to say.
Amendment No. 151 is just a drafting issue—an attempt to tidy up subsection (5)(b). Again, I would be grateful for the Minister’s comments, if he has an argument against it, but I am not inclined to divide the Committee.
6.30 pm
Ian Pearson: I am advised by those who draft the clauses that the hon. Gentleman’s amendments seek to make “stylistic changes”.
Mr. Breed: It is called English. [Laughter.]
Ian Pearson: I do not think that there is disagreement in principle between myself and the hon. Member for South-West Hertfordshire. I admit that I am not familiar with the fine distinction between “subserviate” and “subordinate”. I urge the hon. Gentleman not to press his amendments, but I will certainly take away the question of whether “subordinate” is a clearer use of the English language and should appear in the Bill, or whether we need “subserviate” or something else that is plainer English. I will talk to officials and, if necessary, come back on Report with amendments.
Mr. Gauke: I am grateful to the Minister; that was as good a response as I could have hoped for. We are united in this; he is absolutely right that the amendments are stylistic—there is nothing necessarily wrong with that. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 53, as amended, ordered to stand part of the Bill.

Clause 54

third party compensation: discretionary provision
Mr. Gauke: I beg to move amendment No. 117, in clause 54, page 25, line 35, leave out
‘persons other than a transferor’
and insert
‘pre-transfer creditors and shareholders’.
Subsection (1) of the clause refers to persons “other than a transferor”. My understanding—the Minister may correct me—is that such persons will be pre-transfer creditors and shareholders. I tabled the amendment partly as an attempt to seek clarification as to whether that is correct, or whether there is another form of third party that might be paid compensation. If my understanding is correct, it raises the question of whether we should be slightly more specific in the legislation, and I should therefore be grateful for the Minister’s views.
Ian Pearson: The clause allows the Treasury to make third party compensation orders for all transfers under the SRR powers. Third parties can be creditors or other contractors with the bank. The third party compensation order can either be part of a compensation scheme order or bank resolution fund, or be a separate order. The order may also include provision for an independent valuer and valuation principles, as discussed under the other compensation clauses.
The aim of the clause is to ensure that all relevant third parties in both initial and onwards transfers can be compensated for compensatable interferences in their property rights, arising from an exercise of the stabilisation power. The hon. Gentleman has proposed a probing amendment to specify that third party compensation orders should apply only to pre-transfer shareholders and creditors.
Mr. Gauke: That was a helpful explanation. I am grateful for that clarification. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: No. 111, in clause 54, page 25, line 40, leave out ‘and 50’ and insert ‘to 51’.—[Ian Pearson.]
Clause 54, as amended, ordered to stand part of the Bill.

Clause 55

Third party compensation: mandatory provision
Mr. Gauke: I beg to move amendment No. 152, in clause 55, page 26, line 4, leave out from ‘shall’ to ‘that’ in line 5 and insert ‘ensure’.
The Chairman: With this it will be convenient to discuss amendment No. 153, in clause 55, page 26, line 7, leave out ‘it’ and insert ‘the residual bank’.
Mr. Gauke: I have some general comments to make about the clause, so I shall be as quick as possible on the amendments, which relate to subsection (2). Amendment No. 152 attempts to tighten up the wording. Currently the clause refers to the Treasury having regard
“to the desirability of ensuring that if a residual bank is wound up after transfer, pre-transfer creditors do not receive less favourable treatment than they would have received”.
I suggest that the Treasury shall ensure that happens. Amendment No. 153 simply clarifies that the reference to “it” in the last line of the subsection is the residual bank that has been wound up. I think it is a stylistic point, unless I have misunderstood the clause.
Ian Pearson: The clause provides a safeguard to give creditors a degree of certainty about how they will be treated should they be left in the residual of a failing bank following the exercise of the property transfer powers to transfer some of the failing bank’s property, rights and liabilities. We have already discussed how that is an important safeguard. In effect, the clause provides that the creditors remaining in the residual bank will receive on the winding up of the residual bank, at a minimum, what they would have received had the whole of the bank gone into insolvency. Of course, through the mechanism of the bank resolution fund creditors may receive more than they would have otherwise received, but the clause provides that they shall receive no less.
A second purpose of the safeguard is to ensure that a partial property transfer does not create de facto depositor preference in insolvency. The Government remain committed to the existing insolvency priority rankings and do not propose to introduce a regime of depositor preference. The clause ensures that a partial transfer of depositors from a failing bank will not have the effect of preferring those creditors transferred out.
To provide context to the amendments proposed by the hon. Member for South-West Hertfordshire I shall briefly set out how the safeguard will work, while pointing out that we are currently consulting on the draft regulations and that matters may change as a result of the consultation. Following a partial transfer, creditors remaining in the residual bank will have a claim on the assets that have not been transferred. Realisations from those assets will be distributed by the bank administrator to the creditors in line with the standard insolvency priority order. In certain circumstances the payment received by those creditors may be less than they would have received if the bank had gone into an insolvency procedure. In such situations, the clause will provide a mechanism whereby affected creditors may receive compensation for the amount by which they have been made worse off as a result of the exercise of the stabilisation tools. That amount will be calculated by an independent valuer and will involve an estimation of what realisations would have been made had the whole bank been wound up.
I believe that the purpose of the hon. Gentleman’s first amendment is to require the Treasury to ensure that pre-transfer creditors do not receive less favourable treatment than they would have received had the bank been wound up immediately before transfer. The clause as drafted requires the Treasury to
“have regard to the desirability of ensuring”
that that is the case. It has been drafted that way on purpose. The regulations made under the clause will put in place a procedure to ensure that no creditor will be worse off. That procedure will include calculating hypothetical insolvency of the failing bank. Given the necessarily counterfactual nature of the calculation, it would not be appropriate for the Government to commit in statute to ensuring that creditors are no worse off under that procedure than if the bank had been wound up, because it is not possible to know definitively what that would mean. Therefore, the language—appropriately, I believe—has been drafted in less concrete terms.
Having said that, I assure the hon. Gentleman that the Government are committed to providing adequate compensation to creditors to ensure that the safeguard is effective and provides confidence to creditors who invest in banks. I believe that the Government’s provision under the clause and the draft regulations, on which we are consulting, provides that confidence.
Ms Sally Keeble (Northampton, North) (Lab): On a point of order, Mr. Hood. It is quite hard to hear with the music going on. I do not want to be a complete misery, but it is a bit inappropriate if we are to listen to what the Minister is saying.
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