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Session 2008 - 09
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Public Bill Committee Debates

The Committee consisted of the following Members:

Chairman: Mr. Gary Streeter
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Binley, Mr. Brian (Northampton, South) (Con)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Browne, Mr. Jeremy (Taunton) (LD)
Caborn, Mr. Richard (Sheffield, Central) (Lab)
Carswell, Mr. Douglas (Harwich) (Con)
Coffey, Ann (Stockport) (Lab)
Duddridge, James (Rochford and Southend, East) (Con)
Harris, Mr. Tom (Glasgow, South) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
McCafferty, Chris (Calder Valley) (Lab)
Ottaway, Richard (Croydon, South) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Rennie, Willie (Dunfermline and West Fife) (LD)
Sheridan, Jim (Paisley and Renfrewshire, North) (Lab)
Turner, Mr. Neil (Wigan) (Lab)
Mark Etherton, Committee Clerk
† attended the Committee

First Delegated Legislation Committee

Tuesday 5 May 2009

[Mr. Gary Streeter in the Chair]

Amendments to Law (Resolution of Dunfermline Building Society) Order 2009
4.30 pm
The Economic Secretary to the Treasury (Ian Pearson): I beg to move,
That the Committee has considered the Amendments to Law (Resolution of Dunfermline Building Society) Order 2009 (S.I., 2009, No. 814).
The Chairman: With this it will be convenient to consider the Building Societies (Insolvency and Special Administration) Order 2009 (S.I., 2009, No. 805), and the Financial Services and Markets Act 2000 (Contribution to Costs of Special Resolution Regime) Regulations 2009 (S.I., 2009, No. 807).
Ian Pearson: It is a pleasure to serve under your chairmanship, Mr. Streeter.
The Building Societies (Insolvency and Special Administration) Order and the Financial Services and Markets Act 2000 (Contributions to Costs of Special Resolution Regime) Regulations implement the provisions of the Banking Act 2009 relating to building societies and the Financial Services Compensation Scheme. They were made on 29 March to facilitate the actions taken by the Treasury and the Bank of England relating to the resolution of the Dunfermline building society on 30 March 2009. They are being debated under the “made affirmative” procedure in accordance with the Banking Act. As the relevant powers in that Act are being exercised for the first time, and given the circumstances surrounding the resolution of the Dunfermline building society, which did not allow sufficient time for drafts of the instruments to be laid in advance, the use of the procedure is appropriate in this case.
Both orders were made on 29 March to ensure that appropriate action could be taken as part of the resolution of the Dunfermline building society. However, they are standing instruments and, subject to their approval by the House, will remain in force until revoked or changed. We will consult on the instruments before the summer recess and, if appropriate, bring forward amending instruments at the end of the year, which will also tidy up minor drafting errors. Any amending instruments will be subject to the full draft affirmative procedure.
The Building Societies (Insolvency and Special Administration) Order 2009 was made under powers in sections 130 and 158 of the Banking Act, which allow the Treasury to apply parts 2 and 3 of the Act to building societies. The first procedure relates to building society insolvency. Under part 2 of the Banking Act, the Financial Services Authority or the Bank of England may apply to the court to put a failing institution into building society insolvency on several grounds. The insolvency practitioner must then work to meet two objectives: first, to ensure that, as soon as practicable, depositors either have their accounts transferred to another institution, or receive a payment from the FSCS; secondly, to wind up the society’s affairs, achieving the best result for creditors.
The second procedure relates to building society special administration, which was used in the case of the Dunfermline building society. Under the Banking Act, the Bank of England has powers to transfer a failing building society to a private sector purchaser or bridge bank. What is left of that society may then, on application to the court, be put into building society special administration.
The special administrator has two objectives. The first is to supply services on behalf of the residual society to the private sector purchaser or bridge bank so that it may operate effectively, and the second is normal administration—to rescue the society as a going concern or achieve a better result for the society’s creditors and members than would be achieved were it just wound up. In the case of the Dunfermline building society, it is worth briefly mentioning the natural protection enjoyed by creditors in a building society. As the Committee knows, wholesale creditors in a building society, in contrast to banks, rank above retail members in the creditor hierarchy and so stand in line to be reimbursed early in the insolvency or administration process.
The order is necessary to ensure that the full range of resolution options are available to the authorities when dealing with a failing building society. It is important that sufficient arrangements are put in place to ensure prompt payment to depositors under the FSCS in the event of building society insolvency. It is also important that the bank administration procedure is available so that the full range of special resolution tools is available. The Joint Committee on Statutory Instruments considered the order on 29 April. Counsel to the Committee identified several minor drafting defects, which the Treasury has agreed to correct when an appropriate opportunity arises.
The Financial Services and Markets Act 2000 (Contribution to Costs of Special Resolution Regime) Regulations 2009 were made under new powers in the Financial Services and Markets Act 2000 inserted by section 171 of the Banking Act. Allowing the FSCS to contribute to the costs of resolving a failing bank has always been a key feature of the special resolution regime. The SRR provides the authorities with new tools to facilitate dealing with banks or building societies that get into financial difficulties, and we discussed those at length with the hon. Member for Fareham in the Banking Bill Committee.
The Government believe, as a point of principle, that the financial services sector, through the FSCS, should contribute to the costs. Where intervention is necessary to prevent the cost to the wider economy of a failure of a bank or building society, there is a strong argument for those firms to contribute to its cost. Additionally, a firm will be placed in the SRR only if it is failing, or is likely to fail, to satisfy its threshold conditions for doing regulated financial business under the Financial Services and Markets Act 2000. Such failure would probably lead to the FSA revoking the firm’s authorisation, which would inevitably lead to the firm collapsing. If it were not put into the SRR, it would be declared in default and a payout under the FSCS would follow. Therefore, without the SRR, the financial services sector, starting with deposit-taking firms, would have to fund the costs of FSCS compensation anyway.
It follows that there must be a limit on the FSCS contribution—the contribution must not exceed the compensation that the FSCS would otherwise have to pay, less the recoveries from the winding up or administration. The limit is included in the Banking Act, which also allows for regulations to set out in more detail how the limit is to be calculated and what arrangements are needed, including provision for valuation of recoveries, verification of the scheme’s final liability, and disputes and appeals. Those regulations are before us today.
The regulations allow for a contribution at the end of resolution or before it. Contributions at the end of resolution will be calculated on a net basis—compensation less estimated recoveries. Contribution before the end of resolution will be on a gross basis but will be adjusted so that the Treasury refunds excess payments. In the case of Dunfermline, the FSCS will make a payment on a net basis at the end of resolution. Therefore, the FSCS has had to pay no money up front. That is different from the situation of Bradford & Bingley, Heritable, and Kaupthing Singer & Friedlander in which the FSCS made up-front contributions to the costs of transferring deposits, which it had to fund with loans from the Bank of England, which have been refinanced by the Treasury.
The Amendments to Law (Resolution of Dunfermline Building Society) Order is made under section 75 of the Banking Act. Committee members will be aware that section 75 was included in the Act so that provisions of primary and secondary legislation and common law could be amended to facilitate resolution in accordance with objectives such as promoting financial stability, protecting depositors and ensuring efficient use of public funds. The amendments to existing legislation include making effective the transfer to Nationwide of shares in a subsidiary of Dunfermline and, in part 3, making provisions for Dunfermline bridge bank, such as exempting it from the Freedom of Information Act 2000 and conferring qualified immunity from litigation on its directors.
The substance of the order is largely technical. Reflecting the new responsibilities assigned to the Bank of England under the Banking Act, the order supports the property transfer instrument made by the Bank, which transferred Dunfermline’s member business to Nationwide building society and its social housing portfolio to the bridge bank owned by the Bank of England. The rump of Dunfermline was then placed into building society special administration following an application to court and by court order. Article 3 of the order supports the transfer of shares in Dunfermline Nominees, effected by the property transfer instrument, by modifying certain provisions of companies legislation in consequence of the nature of the transfer. It ensures that the transfer to Nationwide of that subsidiary was effective from day one.
Article 4 relates to employees; most would transfer to Nationwide automatically through the Transfer of Undertakings (Protection of Employment) Regulations 2006—TUPE. This provision ensures that all employees of Dunfermline are transferred to Nationwide irrespective of whether they would fall within the scope of TUPE, and accordingly they will enjoy the protections of the legislation.
Article 5 makes it clear that liabilities in respect of the Dunfermline pension scheme are not assumed by Nationwide.
Mr. Mark Hoban (Fareham) (Con): If the pension liabilities are not to be borne by Nationwide, what other body will bear them?
Ian Pearson: I shall reply categorically to the hon. Gentleman in my closing response, but my assumption is that the liabilities are part of the rump, which is in special administration. I will clarify that point.
I have already mentioned the provisions made under part 3 in relation to the Dunfermline bridge bank, which have been a feature of previous banking resolutions under the Banking (Special Provisions) Act 2008. Articles 9 and 10 again make technical provision for the FSA’s rule-making powers, which has been made by previous resolutions. Article 11 provides for the treatment in insolvency of the claims that the Treasury will acquire against Dunfermline in the special administration in consequence of the Treasury’s entering into the funding agreement with Nationwide. The Treasury has supplied cash to make up retail deposits in the transfer to Nationwide, and the order therefore also provides that the Treasury’s claims shall have the same priority in insolvency as the claims that they replace.
During the passage of the 2009 Act, hon. Members raised their concerns about the potential for section 75 orders to be made with retrospective effect. Once again, the powers that we have taken demonstrate how we intended to use the powers as framed under the Act and as set out in detail in the code of practice. In this case, the order was made at 9.45 am on 30 March, but had effect from 8 am, so that it came into force at the same time as the property transfer instrument that executed the transaction. That was necessary as the order needed to reflect the provisions of the property transfer instrument, and the transfer needed to take place before the opening of Dunfermline’s branches on the Monday morning.
In conclusion, I recognise the concerns of those who contributed to the debate on that aspect of the Act during its passage, particularly the hon. Member for Fareham, about the breadth of the powers and their retrospective effect. I want to reiterate the point made during those debates that the powers are an essential complement to the Bank of England’s transfer instrument in such transactions. In the resolution of the Dunfermline building society, the order ensures the completion of the transaction and certainty for depositors and consumers. In the circumstances of such a resolution, that certainty is critical to ensuring stability for the system as a whole and protection for depositors and consumers. I therefore commend the two orders and the regulations to the Committee today.
4.42 pm
Mr. Hoban: It is a pleasure to serve under your chairmanship for the first time, Mr. Streeter.
The explanatory memorandum to statutory instrument 805 states:
“While this Order has been made on an expedited basis to assist with effective resolution of a specific institution, the Government has committed to consulting on application of Parts 2 and 3 to building societies, and will do so as soon as possible.”
I was going to ask where the Government had got to in drawing up the extension of parts 2 and 3 to building societies before the problems with Dunfermline. The Minister pre-empted my question about the timetable for consultation, because we want to make sure that the order works as it should do, in that the legislative framework for building societies is different from that for banks. Some thought has to go into ensuring that the insolvency administration process works properly and gives the expected outcome when a building society is in trouble. Will the Minister confirm that, when there is a proper consultation on the statutory instrument, he will publish the outcome, so that people can see the comments from the specialist practitioners and the extent to which the statutory instrument requires amendment later in the year?
Statutory instrument 807, again, is a work in progress. The explanatory notes say:
“These Regulations have been made on an emergency basis”.
They reflect broadly the safeguards that we expected, based on our Banking Bill debates in Committee. However, given that the regulations have been made “on an emergency basis”, I thought either that they would be time-limited in application—there would be a sunset clause—or that they would be drafted to apply only to the Dunfermline building society. Will the Minister explain why neither of those two approaches has been adopted in this case and why he expects the regulations to stand, subject to further consultation?
I have a couple of questions on S.I. 807. Regulation 4 refers to a notification to be published by the Treasury. When did the Treasury produce a notification to the scheme manager in respect of the Dunfermline building society? What was the estimate of “Amount A” in regulation 4(2)(vii)(bb)? Has the FSCS come back with “Amount B”, which is its own estimate of the cost of resolution? The Minister’s remarks drew the distinction between the rescue of the Dunfermline building society and other examples, such as Bradford & Bingley and the Icelandic banks. He said that, unlike in those situations, the FSCS has not made an up-front payment to finance the transfer of accounts to Nationwide. Could he remind the Committee how that transfer was financed? Were appropriate assets transferred to match the liabilities in that situation? Also, how much has Nationwide paid, if anything, for that bit of the Dunfermline building society that it has acquired?
Turning to S.I. 814, the amendment to law, the Minister commented that it has been subject to some debate in Committee. There was quite extensive debate about the Henry VIII powers in that part of the Bill. I was surprised when I read the statutory instrument, because I had not expected it to be so extensive. In Committee, we pressed the Minister on two or three occasions to tell us the matters for which he thought that section 75 powers might be used. We had a go—on shadow directors, to which we shall revert in a minute—but the Minister was not forthcoming. On that basis, we assumed that the Government had covered all the bases when it came to putting the SRR into practice. It was surprising, therefore, to see the number of different regulations being made under the provision.
For example, why is it necessary to have regulation 4? We should have anticipated in the discussion on the Banking Act that groups of employees would need to be transferred across from the old owner to the new owner of the business, or stay with the bridge bank. There should be provision in the Act to cover TUPE.
There was a clause on pensions in the Act, but in this situation there are amendments to the way in which the Pensions Act 2004 will be applied. The Bank of England is exempt and not treated as a relevant person for this purpose, but we should have known at the time of the Banking Act that the Bank of England could potentially fall foul of the Pensions Act, and should therefore have been excluded from the provisions in sections 38 and 43 of that measure. I am at a bit of a loss as to why that was not picked up during proceedings on the Bill—perhaps that reflects the scrutiny that it received. There was extensive consultation with outside interest groups, and I should have thought that somewhere along the line, someone would point out that we needed to think about the consequences of the bridge bank model for the Pensions Act.
The Minister glossed over two aspects of part 3 of the statutory instrument, but surely proceedings against directors should have been identified in the context of the Banking (Special Provisions) Act 2008, and perhaps formed part of the Banking Act, rather than being introduced under section 75 powers. We had a debate in Committee about shadow directors. The Banking (Special Provisions) Act dealt with that issue; it was not in the Banking Act, yet the first time the powers are used, they make amendments under the order to provide that relevant persons, such as the Bank, a Minister of the Crown, the Treasury, United Kingdom Financial Investments Ltd and people employed by any or all of those, will not be covered by the shadow director provisions.
Regulation 8 regarding the Freedom of Information Act was used in the context of Northern Rock. The Government should have decided in principle and included a fixed rule in the Banking Act to provide that freedom of information would not apply to a bridge bank. In this case, the Government have sought exemption for the Dunfermline bridge bank from the Freedom of Information Act. Will the Minister explain why they decided to do that? In what circumstances might a future bridge bank not be exempt from the provisions of that Act?
In part 4, “Miscellaneous”, we have modifications to section 138 of the Financial Services and Markets Act 2000 to facilitate the property transfer instrument that transfers the Dunfermline building society’s activities to Nationwide. Will the Minister explain what barriers in the 2000 Act would prevent the property transfer instrument from being effective in this case? Does that apply only to Dunfermline building society, or is there a broader set of issues that should have been reflected in the Banking Act?
Although we have relatively few concerns about S.I. 805 and S.I. 807, people reading S.I. 814 will be surprised at the extent of the provisions included therein. Section 75 was meant to be used sparingly in unforeseen circumstances, but the first time that it has been used, a raft of changes have been introduced. That makes me wonder whether the consultation and thought process underpinning the Banking Act was as rigorous as it should have been.
4.54 pm
Mr. Jeremy Browne (Taunton) (LD): It is a pleasure to serve under the chairmanship of a fellow south-west Member of Parliament for the first time, Mr. Streeter. I hope that my hon. Friend the Member for Dunfermline and West Fife will catch your eye later and have an opportunity to contribute to the debate, because he has the unique perspective of being the constituency representative of the institution under consideration. Before that, I wish to contribute a few additional thoughts to the comprehensive case made by the hon. Member for Fareham.
The situation was an extremely traumatic occurrence for the building society’s employees, as well as those whose savings and other finances were held by the institution. We have to be mindful of their interests and ensure that we act in a way that reassures them. I did not have the pleasure of serving on the Banking Bill Committee, so I cannot comment on the inadequacy or otherwise of the scrutiny given to that Bill, but it seems strange that the Government have introduced the proposals under discussion in this form. In response to the sizeable shock to the banking and building society sector, the Government seem to be making it up as they go along.
I will ask a few questions for the Minister to address when he concludes our deliberations. How will the independent valuer determine the cost of the FSCS contribution? The valuer will clearly need to take into account a whole range of factors to try to calculate the cost, which may in some way be a notional cost, so how will that be done? Furthermore, following on from the intervention by the hon. Member for Fareham, to whom the Minister promised to respond when he concludes the debate, what, in the Minister’s estimation, will the shortfall be, and who will cover it? In other words, what are the liabilities in terms of the taxpayer potentially having to bridge that gap? Moreover, what is the timetable for the process? I ask that partly because we all, as representatives of the taxpayer, have an interest in the issue, but also because everyone associated with the Dunfermline building society, whether they are a saver, a borrower or an employee, has a direct interest in the process.
Finally, I turn to the nature of the arrangement, which is a wider point that was debated at length in Westminster Hall on 10 March. I think most people accept that the banking and building society sector has a responsibility to police itself, and to ensure against risk and loss within it. There is no reason why problems such as those under discussion should always fall into the taxpayer’s lap; there are severe public borrowing problems at present, and there are enough demands on the taxpayer as it is, which most people view as unreasonable.
It is ironic that we are discussing a building society, because the public focus has mainly been on the banking sector’s losses, and there is a widely held view that building societies are having to pay a disproportionately large amount of money to insure against the potential losses of the banks, even though those who are paying out the most in percentage terms actually have the smallest risk to their own business. It would be a great irony if a building society found itself threatened because it had to pay such a substantial levy to contribute to the scheme under discussion. I would therefore be grateful if the Minister will state whether he thinks that the overall FSCS system is, in the light of experience, satisfactory, and whether modifications can be made to improve the system as a whole.
4.58 pm
Charlotte Atkins (Staffordshire, Moorlands) (Lab): I wish to follow on from that last point, because building societies in general operate a far less risky financial model than that of the banks. Having said that, building societies’ contribution to the FSCS is disproportionate; it is roughly three times that of the banks. For instance, on average a building society contributes around 9 per cent. of its pre-tax profits, while a bank contributes 3 per cent. on average. If we are talking about a small building society, the reality is that in 2008 a small building society in my constituency—Leek United—paid out 20 per cent. of its pre-tax profits towards the levy. A bigger building society in my constituency paid out £19.8 million in 2008, which is money that would have gone to its members. I should declare an interest here—I am a member of Britannia building society. The money would have gone towards better deals for members, but we have the disproportionate contribution made by building societies when Dunfermline building society is the first building society to be bailed out by the Financial Services Compensation Scheme, and the predecessor schemes as well. It seems to be a disproportionate burden on building societies that have conducted themselves prudently. They have to bail out banks, by and large. No building society would deny that it needs to make a contribution, but the issue is the disproportionate contribution that they make towards the scheme, which disproportionately bails out banks as opposed to building societies.
5 pm
Willie Rennie (Dunfermline and West Fife) (LD): I could not agree more with the comments of the hon. Member for Staffordshire, Moorlands. I too contributed to the debate on this subject in Westminster Hall, about 20 days before the Dunfermline was broken up.
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