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
societys 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 administrationto rescue the society as a going concern
or achieve a better result for the societys 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 firms
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 contributionthe
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 schemes 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
basiscompensation 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 Dunfermlines 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 2006TUPE. 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
FSAs 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 Treasurys 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 Treasurys 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 Dunfermlines 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
Englands 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.
As the
Minister said at the start of his remarks, the three statutory
instruments have been delayed as a consequence of the problems of
Dunfermline building
society. It is ironic that the first use of the powers under the Banking
Act is in respect of a building society and the developed legislation.
Given our debates in Committee and our understanding that parts 2 and
3 of the Actthe bank administration process and the bank insolvency
practiceswere to be extended to building societies, we did not
spend a great deal of time on them because it was work in progress,
so it is slightly curious that they form the first bit to be used.
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 applicationthere would be a
sunset clauseor 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 Ministers 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 goon shadow directors, to which
we shall revert in a minutebut 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 Billperhaps
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
societys 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
societys 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 Ministers 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 taxpayers 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 sectors 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 constituencyLeek
Unitedpaid 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 hereI 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.