Banking Bill

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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.
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Amendment, by leave, withdrawn.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 the 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.
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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 56

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 57

General 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.
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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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