House of Commons
|Session 2008 - 09|
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Public Bill Committee Debates
Draft Heritable Bank plc (Determination of Compensation) Order 2008
The Committee consisted of the following Members:
Alan Sandall, Committee Clerk
attended the Committee
The following also attended (Standing Order No. 118):
Third Delegated Legislation Committee
Monday 15 December 2008
[Miss Anne Begg in the Chair]
Draft Heritable Bank plc (Determination of Compensation) Order 2008
That the Committee has considered the draft Heritable Bank plc (Determination of Compensation) Order 2008.
The Chairman: With this it will be convenient to consider the draft Kaupthing Singer & Friedlander Limited (Determination of Compensation) Order 2008 and the draft Bradford & Bingley plc Compensation Scheme Order 2008.
Ian Pearson: It is a pleasure to serve under your chairmanship, Miss Begg, to debate the orders. We have agreed to debate the three statutory instruments jointly. They concern the draft compensation orders for Bradford & Bingley plc and for Kaupthing Singer & Friedland and Heritable, the United Kingdom subsidiaries of the Icelandic banks Kaupthing and Landsbanki respectively.
I turn first to the draft Bradford & Bingley order. Many members of the Committee will be aware of its background so I shall take the opportunity to summarise briefly the events in the run-up to taking Bradford & Bingley into public ownership. Following the recent turbulence in global financial markets, Bradford & Bingley found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution. On Saturday 27 September, the Financial Services Authority determined that the firm no longer met its threshold conditions for operating as a deposit-taker under the Financial Services and Markets Act 2000 and the FSAs rules.
When the extent of the problems became clear, the Government had two options: to risk letting the bank go under or to provide support. Letting the bank go under would have risked instability spreading, with serious consequences for the UKs financial system and wider economy. It was because of that risk to stability in particular that the Government, acting in consultation with the FSA and the Bank of England, chose to step in. Officials worked over the weekend to bring about a part-public, part-private solution. The objectives of that action were to maintain financial stability and protect depositors, while minimising the exposure of taxpayers.
A transfer order under the Banking (Special Provisions) Act 2008 allowed for an immediate transfer of Bradford & Bingley into public ownership and for the onward transfer of the retail deposit business to Abbey National plc. That was crucial for maintaining financial stability and for ensuring that customers retained access to their accounts. As members of the Committee will be aware, in the event of the Banking (Special Provisions) Act being used to transfer shares or to extinguish share options, section 5 requires the Treasury to establish a
The draft Bradford & Bingley plc Compensation Scheme Order reflects the model used in the case of the Northern Rock plc Compensation Scheme Order 2008, and provides for an independent valuer to assess any compensation payable to the former shareholders of Bradford & Bingley. As in the case of Northern Rock, hon. Members will recognise the need for a fair and proper way in which to assess the amount of compensationif anythat should be paid in the circumstances.
The Banking (Special Provisions) Act, which has been debated and agreed in both Houses, makes it mandatory for any compensation scheme to be based on the assumption that state support has been withdrawn and that no such support will be provided in future. It is fair and right that taxpayers should not be expected to pay compensation for value that would not exist without their support, and the mandatory assumptions under the Act give effect to that.
However, it is important to note that the order does not impose additional assumptions on the valuer of Bradford & Bingley as were imposed on the valuer of Northern Rock. Under the Northern Rock plc Compensation Scheme Order, as well as assuming that state support had been withdrawn and that no such support would be provided in future, the valuer was required to assume that Northern Rock was not a going concern and that it was in administration. When it was taken into public ownership in February 2008, Northern Rock had been in receipt of substantial institution-specific financial assistance for more than five months in the form of both loans from the Bank of England and the provision by the Treasury of guarantee arrangements. By contrast, no Treasury guarantee arrangements had been provided to Bradford & Bingley, and no loan facilities had been provided to it by the Bank of England that were also not open to all qualifying institutions.
The order sets out that the amount of any compensation payable will be determined by an independent valuer appointed by the Treasury. We intend to advertise for expressions of interest in that position in the new year, if the Committee and the other place agree to the order. After a proper selection process, and after consulting the Institute of Chartered Accountants in England and Wales, the Treasury will then make an appointment. We will, of course, be looking for someone who is independent of all interested parties and who has extensive company valuation skills and the ability to handle the range of relevant stakeholders. Once an independent valuer has been appointed, he or she will decide on the process to be followed. They will determine the value of Bradford & Bingley shares based on the transfer data and the assumption that public support was withdrawn and no such further support was provided. They will come to a decision on the amount of any compensation payable.
Philip Davies (Shipley) (Con): On the point that valuation will reflect the fact of no financial support, will the Minister concede that the whole banking system was underwritten by the taxpayer 10 days later, after Bradford & Bingley was taken into public ownership? Its share prices reflect the public support given, so why would that not be the case with others?
Ian Pearson: The principle debated when the Banking (Special Provisions) Act 2008 was passed, was that in situations such as this, the working assumption should be about how a company would have performed or been valued had there been no forthcoming Government support. That is the approach we adopted with Northern Rock, which currently has an independent valuer appointed to it. The value of a company should not be inflated just because it has taxpayer support, and I am sure that the hon. Gentleman recognises that. However, I appreciate the concerns of his constituents, many of whom will be shareholders in Bradford & Bingley.
I will now look at Heritable and Kaupthing Singer & Friedlander, and the determination of compensation orders made under section 7 of the Banking (Special Provisions) Act. As hon. Members will know, in the event of the Act being used to transfer liabilities or rights, section 7 requires the Treasury to make provision by order to determine the amount of any compensation payable by the Treasury to the authorised UK depositor concerned.
On 7 and 8 October 2008, the FSA decided that Heritable and KSF respectively no longer met their threshold conditions and were unlikely to be able to continue to meet their obligations to depositors. Accordingly, the Chancellor announced, by an order made under the Banking (Special Provisions) Act, that the retail deposit businesses of Heritable and KSF were to be taken into public ownership. Heritable and KSF were placed into administration and their retail deposits were subsequently transferred to ING Direct. The position regarding Heritable and KSF is different from that of Bradford & Bingley as no shares were transferred, only liabilitiesthe retail deposit books and associated rights. A much simpler compensation process is therefore appropriate.
The deposit books transfer to ING Direct was backed by cash provided by the Treasury and the Financial Services Compensation Scheme. The cash sumwhich is now the amount that the Government seek in the administration of Heritable and KSFwas equal to the deposit liabilities, less the amount paid by ING Direct to the recipient. That was £1 million for Heritable, and £5 million for KSF. Given that the transfers were made up primarily of liabilities to repay retail deposits and associated rights, that the transfer would not have been possible without significant amounts of public support, and that the administrations benefit from the £1 million and £5 million negotiated with ING Direct for the deposit books, the Government believe that no compensation should be payable for the transfers. The compensation orders therefore provide in both cases that there is to be no further compensation process and that the amount of compensation payable is nil.
Sir Alan Beith (Berwick-upon-Tweed) (LD): Will the Minister clarify what role in this process, if any, was played by the amounts in the treasury of KSF in London that belonged to depositors in the Crown dependency versions of Kaupthing in the Isle of Man? A similar situation arises with Heritable elsewhere. Does the International Monetary Fund loan process I imagine that the Minister has been personally involved in discussions on thatinvolve any conditions relating to those funds?
Ian Pearson: I understand that the right hon. Gentleman is asking what role the Government played in respect of deposits from KSF Isle of Man and other banking institutions outside the UK. Both KSF and Heritable have UK subsidiaries that are regulated by the Financial Services Authority. He will know that the Isle of Man has a completely separate jurisdiction, so it would not be appropriate for me to comment on it. My understanding is that KSF Isle of Man took a commercial decision to deposit a sum of money with KSFs UK subsidiary rather than in Iceland or elsewhere. KSF Isle of Man appears as a creditor in the normal way in the administration that is taking place.
Sir Alan Beith: That leads to my second question, which encapsulates the first. In the International Monetary Fund loan negotiations with Iceland, were any conditions attached to ensure that the Icelandic Government met their obligations to the KSF institutions in various jurisdictions? That might relieve the problem that the Minister describes.
Ian Pearson: During discussions on the loan with the IMF, the Government have been at pains to make it clear that the Icelandic authorities need to treat all creditors fairly, whether they are UK creditors or those with interests through the Crown dependencies. It is a matter of international law that that should be the case, and we have stressed to the IMF and the Icelandic authorities that all creditors should be treated fairly in the administrations that are taking place in Iceland. Conditions imposed on the loan include the honouring of obligations under the European Community deposit guarantee scheme directive and, as I have said, the fair, equitable and non-discriminatory treatment of creditors.
I hope that I have explained clearly the background to the orders and why they are necessary. I look forward to hearing what hon. Members have to say.
I shall deal with the orders in a slightly different order from the Minister, considering Kaupthing and Heritable first. That should not detain us for too long. As the Minister said, the orders relating to those banks provide for the compensation payable to their administrators to be nil. On one level it is good news for the taxpayer that we are not going to fork out even more money on bank rescues, but I wish to ensure that the Minister is certain that the price the Government got for the transfer of the savings books of those two businesses to ING was fair.
Any compensation payable to the administrators would have been added to the pot for distribution to creditors. The Minister will know that a large number of charities have an interest in that, including Naomi House in Hampshire. There are also councils, other wholesale depositors and KSFs fellow group subsidiary KSF Isle of Man, which was mentioned by the right hon. Member for Berwick-upon-Tweed. Many people are interested in ensuring that the pot of money available to the administrators of the two banks is at its peak, to maximise the dividend that they will get from the administration.
Is the Minister certain that the value of £1 million for Heritables deposit book and £5 million for that of KSF, which the Government negotiated with ING, is fair and that they got the best possible deal? If they sold it at less than the market value, they have clearly done a disservice to the creditors of Kaupthing and Heritable. Will he make it clear who received the £5 million and the £1 million? Is it sitting somewhere in the Treasurys coffers or has it been transferred to the administrators of those banks? I should like to know who benefited from that transfer. There is greater scrutiny on the administration and liquidation of those two banks because of the concern that has been expressed about the sums that are available to their creditors.
On the Bradford & Bingley orders, only three MPs in the room debated the Northern Rock compensation order a few months agome, the right hon. Member for Berwick-upon-Tweed and the Lord Commissioner of Her Majesty's Treasury, the hon. Member for Waveney (Mr. Blizzard). Bradford & Bingley shareholders will understand the measure. They are in a better place than the Northern Rock shareholders, who expect to get nothing from the Northern Rock compensation process. I would be grateful if the Minister could confirm my interpretation of the order, which is that Bradford & Bingley shareholders are likely to do a little better. Article 3(2) states:
The amount of compensation payable to a person shall be an amount equal to the value immediately before the transfer time of all shares in Bradford & Bingley held immediately before the transfer time by that person.
I do not wish to pre-empt the valuers view, but I take as the starting point the share value of Bradford & Bingley shares prior to that weekend, meaning the closing market price on the Friday. I should be grateful if the Minister would confirm that.
I also interpret article 4 as suggesting that employees and others who had share options in Bradford & Bingley are likely to receive compensation. Of course, that includes employees who work at every level of Bradford & Bingley, including those at the top, who may well have steered the bank into the rocks. I would be grateful if the Minister could confirm whether the managers and directors who set the strategy that in part led to the banks problems will also receive compensation under the order.
As I understand it, Santander paid £612 million for the assets that it acquired under the carve-up of Bradford & Bingley, which included the branch network and so on. Will the Minister explain who will benefit from that money? Will it in effect be used to reduce the compensation bill for the taxpayer, presuming that the taxpayer will pay the bill? Will he tell the Committee who will pick up the tab for the compensation?
Obviously, as I said, the compensation will go further than the compensation for Northern Rock shareholders, but it will be a bitter pill for those who subscribed to the rights issue that was meant to rescue Bradford & Bingley, who will consequently suffer losses. Will the Minister clarify a little more the difference in the valuation bases between Northern Rock and Bradford & Bingley? The former received financial assistance from the Bank and the Treasury, as the Minister outlined, which was factored in to the valuers terms of reference. About £14 billion
The Minister suggested in his remarks that Bradford & Bingley was not a going concern when it was acquired by the Government and parcelled up. Did he mean that? The presumption is that, although Northern Rock was solvent at the time it was nationalised, and certainly when it received financial assistance from the Government in September last year, it lacked liquidity to pay its debts as they fell due. It would be useful if the Minister could clarify what he feels are the differences between Northern Rock and Bradford & Bingley, and how they will be reflected in the valuation for Bradford & Bingley shareholders.
In compensating the shareholders we end up with a curious situation. They will get compensation on the basis outlined in the order, which we think will be based on the closing share price before Bradford & Bingley was parcelled up, Santander will pay £612 million for the assets that it wants and the Financial Services Compensation Scheme will pick up the cost of the loan that was used to finance the transfer of balances to Santander. It will also pick up the tabs for any problems with the mortgage bookthe bit of Bradford & Bingleys operations that is currently state controlled.
Normally, when a business is undergoing financial problems and there is some form of break-up, the shareholders will initially bear the cost of any shortfall in assets, as they will receive less on distribution in administration or liquidation, but in this case it appears that the position of the shareholders is guaranteed. The valuation basis set out in the order does not take account of any deterioration in the value of Bradford & Bingleys loan book. Will the Minister confirm that the compensation scheme will bear the cost of any deterioration in Bradford & Bingleys loan book? If so, we will see the odd situation whereby other building societies, for example, will pick up the cost of rectifying Bradford & Bingleys problems, through the FSCS.
Finally, will the Minister update us on the current position regarding the part of Bradford & Bingley that we own? We have not heard a great deal from the Government since the end of September about the state of the mortgage book, the level of arrears, and the business plan for Bradford & Bingley. As the taxpayer now owns Bradford & Bingley, it would be helpful to have some indication of how the Treasury will keep taxpayers in touch with the current state of affairs there.
Mr. Colin Breed (South-East Cornwall) (LD): I will briefly build on what the hon. Gentleman has just asked, as those are the fundamental questions on Bradford & Bingley. To clarify, although things happened quickly, it is the sequence in which they happened that I and others would like to understand. It would be interesting to know when and by whom it was decided that the threshold conditions could not be met. If it was agreed
As the hon. Gentleman said, how will any residual aspects of Bradford & Bingley, which may have some value in the future, be factored into the compensation that might be paid? Will the former shareholders have to wait an extremely long time before they get any understanding of what their shares may be worth, because it is necessary to see how the loan book and everything else pan out?
Mr. Nick Raynsford (Greenwich and Woolwich) (Lab): I shall not detain the Committee long, as I strongly support the action that the Government are taking to stave off the crisis in the banking sector in respect of Northern Rock and Bradford & Bingley. However, I have received a letter from a constituent who is a shareholder in both Northern Rock and Bradford & Bingley and whose view of the outcome is different from that of the hon. Member for Fareham, who suggested from the Opposition Front Bench that shareholders in Bradford & Bingley, sadly, would have done better than shareholders in Northern Rock. My constituent writes:
The government has apparently placed itself above the B&B subordinated bond...holders in the settlement rankings while in the case of Northern Rock they are below the bondholders. As it happens I hold bonds in both these institutions and those in Bradford & Bingley have fallen to one tenth of their former value as a result of this.
That may or may not be the case, but I would welcome clarification from my hon. Friend about the apparent disparity in the treatment of the two, as highlighted by my constituent, who is clearly concerned.
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