Banking Bill

[back to previous text]

Ms Keeble: The hon. Gentleman is pulling out one paragraph of a subsection when, as I understand the drafting, all the subsections apply. It is and, and, and. It is not this one, or this one or this one. To take out one paragraph and say that it is the be-all and end-all is quite wrong. It is a misunderstanding of the way that the legislation is drafted and of all the caveats that have been put in to safeguard against the misuse of order-making powers.
Mr. Gauke: I am grateful for the hon. Lady’s comment, although I do not agree with her. On the question of safeguards, if she believes in safeguards in subsection (9), I hope that she will support amendment No. 120, which inserts a safeguard that the measures should apply only in the event of a systemic risk. Subsection (9) begins:
“But if the Treasury think it necessary”.
—which is not too great a safeguard, I would suggest—it may make an order without complying with the affirmative resolution. The order can be made, but will lapse after 28 days, ignoring recesses. Even if it does lapse, however, nothing done under it is invalidated. Furthermore, under subsection (9)(d), nothing is to prevent the making of a new order, so, conceivably, the Treasury could happily continue making orders every 28 days—it could get defeated, introduce another one and so on ad infinitum.
My point to the hon. Lady is that that is not a set of different conditions, but the order in which things will happen. First, an order will be made without affirmative resolution. Secondly, if it lapses after 28 days, it will be deemed to have been effective before lapsing. That is my objection: in that period, an order changing primary legislation, which Parliament will not have considered, will remain law. If she disagrees with that interpretation, I will happily accept a further intervention.
We have proposed a new subsection (10) stating:
“No Order under this section may amend subsections (8) or (9).”.
The amendment’s purpose is merely to highlight the fact that if clause 65 can enable the Bill to be amended, it could presumably amend the safeguard in clause 65(8), which does at least say that any amendment should be made by affirmative resolution. Presumably, however, the Government could use the affirmative resolution to scrap subsection (8), and from then on the negative resolution only would be used. That does not provide much of a safeguard.
The clause creates great constitutional difficulties, and we in Parliament take such matters very seriously. Some in the outside world are enormously concerned about the way in which the clause injects uncertainty into the system. We already criticise the Bill for causing concerns about partial transfers. That is not a theoretical concern: already transactions are not happening as a consequence. We debated that on Tuesday, and I think that the Government recognise this issue and have made some movement on the safeguards contained in the order-making powers in clauses 42 and 43. However, we have pressed them for more movement, but we are seeing none on clause 65, which undermines the certainty that the capital markets require. Clearly, anything that we can do to try to address that has to be of benefit. It is a practical issue, and the Government do not appear to be moving. Depending on what the Minister says, we will be inclined to press some of our amendments. Unless there is movement, the uncertainty will only increase. I am afraid that clause 65 is already having a damaging impact on the competitiveness of the UK capital markets.
Mr. Breed: I do not want to repeat what the hon. Gentleman said, but I wish to be associated entirely with his comments on the clause. He and his colleagues probably went through the same exercise as we did in attempting to make the clause acceptable by dispelling some of the obvious problems that it causes owing to lack of confidence. The amendment is similar to others that we have tabled, in the sense that we have tried to create some hurdles so as to get an idea of when those powers will be used. The amendment, as drafted, is an excellent attempt to do that, and if the hon. Gentleman presses it I will certainly support him.
As hon. Members will know, we tabled an amendment to delete the entire clause, because I find the first few words wholly unacceptable:
“The Treasury may by order amend the law”.
The Treasury might well be the fount of all knowledge and wisdom, although that has perhaps not been so clearly displayed in recent times, but frankly it is not here to amend the law—we are. I am in principle against that and so will vote against the clause en bloc if given the opportunity to do so on stand part.
I recognise that to a certain extent the clause is written in what we might call a wartime situation. These are extremely uncertain and difficult moments, and almost daily we are regaled with even more horrors of the impending doom and gloom of the next year or two. The banking industry is still in a state of flux, and I accept that we do not know that things will settle down to such an extent that those powers will not have to be used. However, the Bill and those powers are intended to be enduring, so it is intended to address not only wartime situations, but peacetime situations. In a future peacetime situation, such a provision will be wholly unacceptable and have enormous unintended consequences in the capital markets.
At the minimum, we should be looking for such provisions to endure for a limited period, and a two or three-year sunset clause would at least give us the opportunity to review how those powers have operated, and to look, hopefully in a more measured way, at the financial landscape at the time to see whether those rather draconian powers continue to be necessary. I accept that there has been a valiant attempt to establish a clearer sense of when those powers will be used, but as it stands I still find the concept of the Treasury amending the law by order unacceptable, so I will support the amendment if it is pressed and vote for the removal of the clause on stand part.
9.30 am
Ms Keeble: I shall be brief. Aside from some of the specifics, there is an important general point to be made. As the scale and nature of the crisis has unfolded over the past year, one of the things that we have seen is how very fast-moving and innovative the industry is. The legislation attempts to give a statutory framework for dealing with the problems in an orderly way, but there might be a slight culture clash with a fast-moving and innovative industry because, despite the best will in the world, drawing up legislation is by nature a slow and cumbersome process. Unless we have such a provision to enable the Treasury to adapt to changing and perhaps unforeseen circumstances, we will be passing legislation that might be fit for purpose for the last crisis but which will not enable the Treasury to deal with the next one. Although I have many reservations about governmental order-making powers, I think that something of that kind is needed in the circumstances.
Amendment 119 would add to subsection (1) the words
“where the Treasury is satisfied that not to do so threatens the stability of, or confidence in, the UK financial system”.
However, the subsection already includes that proviso, because it refers back to the special resolution objectives set out in clause 4(4) to clause 4(8), which we have already discussed at some length, and agreed on. They cover exactly the kind of points that, I think, the hon. Member for South-West Hertfordshire intends amendment No. 119 to cover.
There is also a restriction on the powers. There are not unfettered powers for anyone in the Treasury to do whatever they feel like. There is a discussion of the general purpose of the exercise of the powers, and which powers can be used. Of course there will always be a need for close scrutiny, and perhaps a suspicion that the Government are using powers to do what they want, without having thought things through clearly in the legislation. However, the clause starts with the general objective, which is more or less what the hon. Gentleman has set out in his amendment, then it defines the powers that can be used and the general purposes. It narrows things down to provide the democratic and parliamentary scrutiny, then it narrows them down further to set out some of the process that should be used.
The issue that must, of course, be dealt with is that the industry will say, “This creates uncertainty. We need more reassurances that the powers will not be used perversely.” Governments are not supposed to do that anyway. That applies to any order-making powers, and there are legal processes for challenging perverse decisions. However, it may be helpful if my hon. Friend the Minister can further explain the thinking about the circumstances that are relevant, or the assurances that the industry might need to make it clear that the powers, which are necessary, would be used only in realistic circumstances.
As a general point, it was appalling that hon. Members were in recess and nothing could happen while economic circumstances changed, and that events that would most affect our constituents unfolded while we were not here. We could not engage in any scrutiny. Also, we knew that if anything were to be done, it would need primary legislation. We all know how cumbersome that is. I welcome the fact that the Government would have a range of powers at their disposal. We have had the chance to discuss that, and there is provision for accountability to Parliament, and for proper scrutiny. Such powers are never particularly welcome, but the hon. Gentleman’s amendments are covered, and his concerns dealt with, and what remains is for my hon. Friend to give the industry some assurances about some of the circumstances.
The Economic Secretary to the Treasury (Ian Pearson): I hope, indeed, to give assurances to the industry and to others who follow such matters closely, and to clarify the situation for hon. Members.
I want first to explain why clause 65 is needed, and then I shall discuss the amendments. Banks often comprise complex, multi-jurisdictional corporate entities. As financial markets continue to develop, the trend is set to increase. Furthermore, many of the provisions of the special resolution regime interact and sit alongside complex financial services, banking, company and insolvency law. The special resolution regime, which, I remind members of the Committee, is a new legislative device, provides the authorities with powers to act with respect to failing banks.
Those are not banks that are functioning successfully and in normal conditions. They are banks that are sufficiently failing to meet the general conditions for intervention and which it is in the public interest to resolve. It is inevitable that there will be conflicts between the public interest objectives and resolving a bank in severe financial distress. Moreover, the provisions of legislation are designed to work in relation to a normally functioning business.
In the absence of a power to amend legislation, as set out in clause 65, there is a material risk that the authorities may not be able to fully effect a transfer, which could impact on the effectiveness of the powers taken in the Bill. That could have adverse implications for financial stability or public funds, which would not be in the public interest.
The purpose of the power is to provide the Treasury with the means to modify legislation to enable the powers of the SRR to be used more effectively. That is set out in subsection (1). However, it is not a general power to amend legislation; it is targeted and limited. In particular, the power may be used only to facilitate the use of one of the stabilisation options. Therefore, the scope of the power is severely constrained to amending legislation, which affects the resolution of banks under the SRR.
In broad terms, there are two ways in which this power can be used. The first way would be for the Treasury to make a specific amendment to a piece of legislation for the purposes of making effective the resolution of a specific bank. The amendment would apply only to the specific bank. It would be localised to the particular resolution. It would not apply to any other bank, or any other banks in respect of which the powers of the special resolution regime were used.
The second way would be for the Treasury to make an amendment to legislation that applied to all resolutions or a class of resolutions carried out under the SRR. For example, the power could be used to disapply a particular provision of the Companies Acts in relation to bridge banks. That would then apply in each resolution in which the Bank of England used the bridge bank tool. It will not apply to other banks.
It is envisaged that that form of modification will be made in the light of resolution experience. For example, it might become clear that a certain provision of legislation is an impediment to resolution in general, and so it is beneficial to disapply it for all subsequent resolutions. The ability to make such amendments limits the need for resolution-specific amendments, and ensures that the tools of the special resolution regime may be future-proofed as the financial markets and banks develop over time.
Regardless of how the power is used, the modification may apply only to a bank subject to the stabilisation option. Modifications do not apply to any other bank. So, for example, the power could not be used to take action with respect to banks participating in any aspect of the recapitalisation process. As no stabilisation power has been used or is proposed to be used on those banks, clause 65 is not applicable.
There is also an appropriate level of parliamentary scrutiny of the use of the power, which is subject to the affirmative resolution procedure. However, in situations of urgency, the Treasury may make the order subject to the 28-day procedure. That is because there may be circumstances in which a transfer needs to be made at extremely short notice, and it is necessary to modify aspects of legislation to make it effective. Any prior requirement for each House to approve a draft order in such circumstances before it may come into force would cause delay, during which time the Treasury would be unable to take the necessary steps to address the failing bank. That could potentially lead to severe disruption in the financial markets, place public funds at unacceptable risk, and exacerbate financial instability.
Ms Keeble: Can my hon. Friend confirm that if the power goes through the affirmative procedure, because of the way in which the days are counted and our recesses fall, it could take some months to get an order through? That would be completely counter-productive in light of the speed needed for many of these processes.
Ian Pearson: My hon. Friend makes a good point. The hon. Member for South-West Hertfordshire raised it in relation to amendment No. 121. He suggested that the 28-day clock would start ticking only when Parliament returns after the recess. That is not the case. Parliament can call a debate immediately after the recess, or a decision could be taken to recall Parliament.
Mr. Gauke: I take the point that the debate could happen straight after the recess—as the Minister said, there is a 28-day clock—but the measure ignores
“periods of dissolution, prorogation or adjournment of either House for more than 4 days”.
It would ignore the recess. The 28-day limit imposed by subsection (9) runs only when the House is sitting, does it not?
Ian Pearson: That could be the case, but it is equally true that the clock does not have to start ticking then, and the debate does not have to be within 28 days. My understanding is that it is perfectly possible for Parliament to debate it immediately after a recess, and I think that that is what would happen in normal circumstances.
Previous Contents Continue
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2008
Prepared 14 November 2008