The
Chairman: The hon. Lady is not being a complete misery.
Indeed, the Chairman has already been a killjoy and has asked for the
music to be turned
down.
Ian
Pearson: Turning to amendment No. 153, the hon. Member for
South-West Hertfordshire seeks to replace the term “it”
with a reference to “the residual
bank”. However, I do not believe that is correct. Replacing
“it” with “the residual bank” would not
refer to the correct counterfactual. As I have stated, the correct
counterfactual is the winding up of the whole bank, not the residual
bank, following a transfer. Having provided some background but
without—I hope—treading on the ground of a stand part
debate, I invite the hon. Member for South-West Hertfordshire to
withdraw his amendment.
Mr.
Gauke: I am happy to take up the Minister’s
invitation. I beg to ask leave to withdraw the
amendment. Amendment,
by leave, withdrawn.
The
Chairman: The jazz club’s annual reception is
providing the background to the Committee.
Mr.
Gauke: I beg to move amendment No. 154, in
clause 55, page 26, leave out line
41. Clause
55(6)
states: “Regulations
may make provision about payment including, in particular, provision
for payments...on account subject to terms and
conditions...by instalment...by the Treasury...by the
Financial Services Compensation
Scheme.” Earlier
in the Committee’s deliberations, there was a lengthy debate
about the Financial Services Compensation Scheme, which I have no
desire to reopen. However, I ask the Minister whether regulations under
the clause would amend or supplement provisions relating to the
Financial Services Compensation Scheme elsewhere in the Bill. There is
a question about the interaction between the third party compensation
regime and the Financial Services Compensation Scheme. I am probing
whether it is appropriate that regulations affecting the Financial
Services Compensation Scheme should be made in clause 55, or
whether that fits slightly oddly in the
circumstances. 6.45
pm
Ian
Pearson: Clause 55(6)(c) and (d) provide that the payment
of compensation to creditors is to be made by either the Treasury or
the Financial Services Compensation Scheme. The hon. Gentleman has
suggested that the FSCS should not be required to contribute to the
cost of providing that safeguard. Let me explain why I do not agree
with him.
The
Government believe as a point of principle that the financial services
sector, through the FSCS, should contribute to the costs of the SRR for
two main reasons. First, where intervention is necessary to prevent the
cost to the wider economy of a failure of a bank, there is a strong
argument for banks to contribute to that cost. Banks in the financial
services sector more widely benefit directly from the achievements of
the SRR objectives, particularly the objective of enhanced financial
stability and confidence in the banking system. It is entirely
appropriate, therefore, that the sector should contribute to measures
that achieve those objectives.
Secondly,
but for the use of a resolution tool, the financial services sector
would have to fund the cost of compensation to depositors arising as a
result of the failure of a deposit taker through the FSCS. Therefore,
it is also entirely appropriate that the Treasury may
provide that the banks should contribute to the cost of compensating
third parties arising from an exercise of SRR tools designed to address
a failing bank. As we will discuss when we reach clause 157, safeguards
have been put in place to ensure that the FSCS can contribute to the
SRR only up to the amount that it would have had to pay out to
depositors had the bank entered
insolvency. The hon.
Gentleman’s point about regulations on FSCS funding being made
at this point in the Bill rather than later is a technical one, but I
will certainly consider it. On a broader point, the Government have
responded to strong stakeholder pressure from the banking industry and
others for safeguards to be provided for partial transfers and for them
to include compensation to creditors made worse off following a partial
transfer. That compensation is a legitimate resolution cost because it
is a necessary cost arising from the exercise of a resolution
tool.
I know that
in responding to consultations on that provision the banking industry
has consistently opposed our plans. It argues that the cost of the
resolution should be met by an acquiring company or the insolvent
bank’s estate, but we strongly believe that the industry, before
taxpayers, should be called upon first to contribute to any shortfall.
There is a fundamental issue of principle in that regard. I appreciate
the probing nature of the hon. Gentleman’s amendments, but it
will be up to him to decide the official view of the Opposition in the
matter.
Mr.
Gauke: I will not press the amendment. The Minister
provided some clarification of the purpose of including the provision
in the clause, and I am grateful to him for looking at the order in
which those things are dealt with. I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
55 ordered to stand part of the
Bill.
Clause
56Procedure Amendment
made: No. 112, in
clause 56, page 27, line 6, after
‘order’,
insert— ‘(a) shall be made
by statutory instrument,
and (b)
’.—[Ian
Pearson.] Clause
56, as amended, ordered to stand part of the
Bill.
Clause
57General
continuity obligation: property
transfers
Ian
Pearson: I beg to move amendment No. 122, in
clause 57, page 27, line 27, leave
out subsection (4) and
insert— ‘(4) The duty to
provide services and facilities in pursuance of the continuity
obligation is subject to a right to receive reasonable
consideration.’.
The
Chairman: With this it will be convenient
to discuss the following: Government amendments
Nos. 123 to
127 Government
new clause 17—Continuity obligations: consideration and
terms— Government
new clause 18—Continuity obligations:
termination.
Ian
Pearson: As I am sure the Committee is aware, major
financial firms do not tend to operate as single legal persons.
Instead, they are organised as groups, generally with a single ultimate
parent company and any number of subsidiaries, which may be organised
into distinct sub-groups. Corporate entities within those groups are
connected through shareholdings but are likely to be connected in other
ways as well. Bank holding companies may have hundreds of subsidiaries.
Members of the Committee should note that Northern Rock was an
unusually simple bank in terms of corporate structure, in that the
holding company was the deposit taker and the bank had very few
subsidiaries. There is no “general rule” about how banks
organise themselves or, in particular, where they locate their systems.
Some banks’ systems are split between subsidiaries; others are
all located in the holding company or a particular subsidiary. For
example, the holding company may employ all the group’s
employees or a specialist subsidiary may provide IT services to the
whole
group. As
we have discussed before, the scope of the special resolution regime is
restricted to deposit takers and does not include other financial
institutions such as investment banks. I have said that the Government
are considering what powers are needed in relation to other firms, but
they do not generally consider it appropriate to extend the scope of
the resolution regime beyond the deposit-taking class and that includes
other non-deposit-taking firms in the financial group in which the
deposit taker sits. However, we recognise that there are arguments for
extending the scope that need to be considered in due
course. It
is possible that the deposit taker may not be operational on a
stand-alone basis. It may require the provision of essential services
from other companies within the group, such as IT systems. If that is
the case, removing it from the group will not lead to an effective
resolution, as the deposit taker will no longer be able to function
without the provision of those intragroup services. The aim of the
pre-insolvency tools is to preserve continuity of banking services.
That aim cannot be met without a functioning bank. Therefore, specific
provisions are needed to deal with such a situation. The Government
consider that the most appropriate solution for successfully resolving
deposit takers that form part of a group of companies is to take powers
to place general and special continuity obligations upon group
companies of the failing bank. Those obligations will be restricted to
ensuring that services and facilities continue to be provided to
businesses
transferred. This
group of amendments comprises a collection of generally technical
amendments to the continuity obligations. In broad terms, the
amendments do two things. First, they provide the authorities with the
flexibility to remove a general continuity obligation that has
arisen—in some circumstances it may be appropriate for that to
occur. The provisions of the special continuity clauses already provide
for the termination of the special continuity obligation, therefore new
clause 18 brings the positions of the two types of obligation in line
with each other. Secondly, they make changes to the consideration that
must be paid to service providers. If a former group company provides a
service, for example IT support, to a deposit taker, an appropriate
amount should be paid for it. There is a difficulty, however, in
characterising an appropriate amount in terms of a market
rate.
In
normal circumstances, the forces of supply and demand would work to
determine the market rate and it is likely that in normal circumstances
such a rate would be an appropriate amount to pay. For example, the
deposit taker could solicit bids, through a tender process, for the
provision of a particular service, and following an open competition,
could select the service provider that offered the best combination of
product and price. Such a process is clearly not suited to the
circumstances surrounding the resolution of a failing bank; we have
already discussed the fact that action needs to be taken urgently. Once
the business is transferred, it is essential that services continue to
be provided to ensure that the deposit taker remains operational from
day one. That is necessary to ensure that depositors retain access to
their accounts, for example. There is likely to be insufficient time
for a transferee to arrange for new servicing arrangements. There will
be one choice: to continue with the same services as
pre-transfer. In
addition, bank systems are often highly bespoke to the particular
business that they support, so it is highly unlikely that a deposit
taker would be able to find and organise an alternative supplier for
essential services at short notice. Given that the deposit taker would
not be able to take advantage of substitute service providers, a former
group company that supplies services is likely to be in a position of
relative power. That position could be used to charge a ransom rate,
because the deposit taker would have no choice but to accept that rate,
given the lack of
alternatives. For
that reason, the Government have tabled amendments to remove references
to “market rate” and “market terms”. We
propose instead that service providers should be paid a
“reasonable consideration”. Government amendments Nos.
122 to 127 provide for that. In addition, new clause 17 provides that
the Treasury may, by order, specify matters that are to be or are not
to be considered in determining what amounts to reasonable
consideration. I
take the opportunity to advise the Committee that the Government will
table further technical amendments to clauses 57 to 60 on Report. Those
will amend the provisions to ensure that they work in situations in
which different parts of a bank’s business are transferred to
different transferees, and in which some or all of a bank is
transferred to an onward transferee. It is crucial that we get the
detail right and that continuity obligations can work in the widest
range of potential resolution scenarios. We tried to prepare the
amendments in time for the Committee’s scrutiny, but that has
not been possible. I apologise to the Committee for that, but I wanted
to draw hon. Members’ attention to those additional technical
amendments so that they do not come as a surprise. I should also inform
hon. Members at this stage that the Government are considering whether
further reserve powers are needed to deal with banking groups where the
holding company is not an authorised deposit
taker. The
continuity obligations that I have just described provide measures to
allow the authorities to deal effectively with circumstances in which
transferring the deposit taker out of a group may not allow for an
effective resolution of the deposit taker. There may also be situations
in which transferring just the deposit taker in a financial group,
while successfully resolving that firm, could create a further threat
to financial stability. Such circumstances may arise if there are other
parts of the
group in financial difficulty whose failure would pose a risk to
financial stability. They could also arise if the transfer of the
deposit taker led to the failure of the group within which it sits,
which is most likely if the bank provides essential services to other
parts of the group. That could create a separate risk to financial
stability, particularly where the other group companies are financial
firms. In
such circumstances, the most appropriate solution may be for the
authorities to seek to resolve the group as a whole, rather than
focusing on the deposit taker alone. The Government have been
considering whether such a power is necessary and have come to
recognise that it may well be. We will continue to keep that under
review in the immediate short term and will introduce further
amendments if necessary. As I have said in a number of
contexts—for example, when we discussed investment banks last
week and in the debate on foreign branches—the Government
continue to keep under review options for action in respect of
financial institutions other than deposit takers. The work on group
holding companies is part of that process. Returning to the amendments
at hand, I hope that they will be incorporated into clause 57 and other
areas of the Bill as
appropriate.
Mr.
Gauke: We appreciate some of the difficulties with the
Bill’s original wording. Indeed, the London Investment Banking
Association highlighted in its written evidence on the Bill some of the
difficulties with regard to clause 57(4) and (6) working together. I
can see that, to some extent, the Government are seeking to address
that concern. I also note that this is work in progress, in that
further technical amendments are to
follow. 7
pm However,
I have an instinctive suspicion of the term “reasonable
consideration”. I can see the difficulties created by the use of
“market rate”, but with regard to reasonable
consideration, the consideration tends to be what two parties reach
agreement on. The idea that a third party can determine what is
reasonable in an abstract way could cause difficulty in a range of
contexts. Will the Minister elaborate on how “reasonable
consideration” will be reached? I have a slight concern about
the amendments, but we do not intend to oppose them, and subject
perhaps to that further clarification, I raise no particular
objections.
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