Draft Heritable Bank plc (Determination of Compensation) Order 2008

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Philip Davies: I, too, will try not to detain the Committee for too long. I will focus on Bradford & Bingley for reasons that are understandable, given that it is based in my constituency and that many of my constituents are shareholders, many are employees and many are both. I have a number of questions for the Minister, to whom I am grateful for meeting me earlier to discuss the issues that have arisen from the nationalisation of Bradford & Bingley.
I am grateful to the Minister for stating from the start that the case of Bradford & Bingley is different from that of Northern Rock. Whereas Northern Rock had been drawing down money from the Bank of England for quite a while before being nationalised, Bradford & Bingley was not in that position. Will he confirm that Bradford & Bingley had £1.5 billion of equity when it was taken into national ownership, and that the sale of the retail savings book is an asset for the shareholders—and not for anybody else—and should be added on? What should come off the valuation is the outstanding losses that may be incurred on the mortgage book.
However, even at the worst estimate of those losses, the combined equity plus the sale of the retail banking business would leave shareholders with about 50p a share. Given that the position of Bradford & Bingley was completely different from that of Northern Rock, it is a shame that Northern Rock is still a trading company with a potential future, whereas the Government have effectively ensured that Bradford & Bingley will no longer exist, ending more than 150 years of heritage in my local area. As I understand it, Bradford & Bingley is on a solvent wind-down.
In response to my intervention about the valuation of other banks, the Minister made the point that the Government are going through a well-trodden process. I totally accept that, but I re-invite him to accept that the circumstances and time scales were different for Bradford & Bingley than for any similar institution in that the whole banking system was underwritten about 10 days after the Government nationalised Bradford & Bingley. Surely that should be reflected in the shareholder valuation.
What really caused a problem for Bradford & Bingley—I would be grateful if the Minister confirmed that this is what he has been told by the company—is that it was taken down by a leak from the FSA, the Bank of England or the Treasury saying that Bradford & Bingley was looking for a knight in shining armour to take over. That was passed to The Sunday Telegraph the weekend before, at which point Bradford & Bingley was in a perfectly reasonable and healthy position. That leak led to its rating being downgraded by Moody’s and all the other credit rating agencies the next day, when they had not planned even to look at Bradford & Bingley’s credit rating for many months to come. That reduction in credit rating prevented any more money from being had on the overnight money markets, which led to deposits being withdrawn and Bradford & Bingley’s demise. Again, that puts it in a very different position.
How long will it take to make the valuation? I concur with my hon. Friend the Member for Fareham that the order states that the valuation will be based on the value immediately before the point of transfer, which will indicate a very clear valuation of the share price before the bank was nationalised—20p a share, I think. Is that the kind of price that the Minister is considering? If so, surely the valuation of Bradley & Bingley will not take long, because the valuers will have only to base it on the share price in the papers the day before the bank was nationalised. I would be very grateful if he could confirm how long it will take, or the time limit that he will impose on the valuer to produce a valuation.
Given that the valuation seems to be very definite, will the Minister consider making an interim payment to shareholders before the full valuation is known? An interim payment that he is confident will at least be reached would have two benefits: first, it would give some money back to the shareholders, while not costing the Government any money, because they will be giving it to them anyway; secondly, the Government believe in providing a fiscal stimulus to the economy. There would be no better way of boosting the economy in my area than putting more money into shareholders’ pockets, some of which they could then go out and spend. I urge the Minister to practise what the Prime Minister has been preaching about a financial stimulus and to make an interim payment to shareholders.
I have two final questions, both of which need answering if we are to know whether a fair valuation will be reached. First, were there any other bidders for the Bradford & Bingley retail deposits when they were sold to Santander? If so, were some of those other bids higher than that made by Santander? My understanding is that at least one, and perhaps two, other bids were on the table, one of which might have been higher than that made by Santander, but that for political or other understandable reasons the Government accepted a slightly lower bid from Santander. Surely, the higher bid should represent the valuation that shareholders receive.
Finally, will the Minister publish the 10-year—I think—business plan being prepared for him by Richard Pym, the chief executive of Bradford & Bingley, to assess its likely performance over forthcoming years? Will he make public its 10-year profit forecasts so that we can see whether any valuation is fair and reasonable? He might say that that information is commercially sensitive, but given that Bradford & Bingley is in effect no longer trading, offering new mortgages or operating in the marketplace, surely it is not. He could publish it freely without any impact on its business in order to give us a fair understanding of whether shareholders in Bradford & Bingley are getting a fair deal.
5.3 pm
Sir Alan Beith: I would like to raise three quick points with the Minister following his helpful explanation at the beginning of this debate. The first relates to the difference between the situations of the Bradford & Bingley and Northern Rock compensation arrangements, to which hon. Members have alluded. As a constituent of mine asked me, why could private shareholders in Northern Rock not simply sit on their shares until it is re-privatised, whenever that might be, and take their chances then?
My second question relates to the Treasury’s potential conflict of interest, which has also been referred to in this debate. In ensuring that compensation is nil in these cases, the Treasury is acting in the UK taxpayers’ interests. However, it has at the same time had to do another job, because the Ministry of Justice has given it the job of representing the Isle of Man and Channel Islands Governments in their negotiations with Iceland and in relation to the International Monetary Fund loan, and those interests are different. Securing a nil burden on the UK taxpayer is surely the primary Treasury responsibility. Securing the availability of more money that could be distributed to the Crown dependencies and therefore used to pay depositors in those dependencies is a different interest. I am intrigued to know how the Minister has managed to ride both those horses at once in the negotiations, or whether he recognises that there is a difficulty.
Thirdly, one of the things involved in these cases is the transfer of a savings book to ING and a savings book to Santander in the Bradford & Bingley case. When the Government or the regulators or both assist, promote and approve a transfer to a particular bank, no doubt seeking to act in the interests of depositors, there nevertheless remains on the part of those depositors a sense that they are now with that bank as a result of the Government having given their approval. When that situation arises, questions are asked by people who were, for example, with the Derbyshire building society or the Cheshire building society, who say, “Well, it was with official approval and entirely without any wish on our part that we found ourselves transferred to various offshore accounts.” What is the Government’s view of situations in which they have somehow secured such a transfer, without any action on the part of the depositors, to another bank in the event that that bank gets into trouble?
5.6 pm
Ian Pearson: Let me first deal with the questions asked about the Icelandic banks and then move on to discuss Bradford & Bingley. The right hon. Member for Berwick-upon-Tweed asked how we could ride both horses, representing the Crown dependencies and UK taxpayers’ interests. We are well used to doing that. It is normal practice that we negotiate on behalf of the Crown dependencies. The key point in this instance has been to ensure that all creditors are treated fairly. We have been arguing strongly, both with the Icelandic authorities, as I have mentioned, and in other international forums such as the IMF, to ensure that that is the case.
The right hon. Gentleman and the hon. Member for Fareham asked how we could be sure that the price of the transfer was fair. As will be appreciated, it is not normal Government practice to comment on the process that was gone through in terms of how many offers the Government received, as that type of information is commercially sensitive, but for Heritable and Kaupthing Singer & Friedlander, there was certainly the potential for a negative profit margin for ING Direct and for other bidders as well. Obviously, amounts of £1 million and £5 million respectively for Heritable’s deposit book and that of Kaupthing Singer & Friedlander are very much nominal considerations.
It should also be appreciated that Heritable and KSF are required to pay back the total of all costs and liabilities owed to the public sector in transferring the liabilities. The amount owed by Heritable to the Financial Services Compensation Scheme is approximately £500 million and to the Treasury is approximately £45 million. The amount owed by KSF to the FSCS is approximately £2.5 billion and to the Treasury is approximately £550 million. We have discussed those amounts in other Committees, but it is fair to point out that they are considerable sums that at the moment are being underwritten by the taxpayer and the FSCS respectively.
The FSCS and the Treasury paid to ING cash equal to the amount of the deposits, less the sums of £1 million and £5 million respectively. The Treasury’s claims in the two banks’ administrations, as I have just mentioned, will be reduced by the same sums, so that the banks will receive the benefit of those.
I shall now move on to some of the questions raised about Bradford & Bingley. I should like to comment first on the threshold conditions and the reason why the action was taken. Paragraph 4 of schedule 6 to the Financial Services and Markets Act 2000 provides that an authorised deposit taker must, in the opinion of the FSA, have adequate resources in relation to its regulated activities. On 27 September, the FSA decided that Bradford & Bingley no longer had adequate resources in relation to its activities as a deposit taker and was unable or unlikely to satisfy claims against it. Accordingly, had the position not been rectified by immediate action, the FSA would have been obliged to cancel, pursuant to section 45 of the 2000 Act, Bradford & Bingley’s permission to carry on regulated activities and withdraw its authorisation pursuant to section 33 of that Act. Bradford & Bingley would, therefore, have been unable to accept deposits when it opened for business on Monday 29 September. Therefore, the FSA made a decision based on its opinion of adequate resources. I stress that key point in response to Committee members’ questions.
Mr. Hoban: The Economic Secretary will know, from our discussion of the relevant section of the 2000 Act in the Banking Bill Committee, that it covers a wide range of issues. Which aspects of the adequate resources rule did Bradford & Bingley breach?
Ian Pearson: The judgment was made by the Financial Services Authority. I do not want to get into the detail, which I am not sure is in the public domain. It was clear, in the FSA’s view, that Bradford & Bingley had failed that test, which is why the threshold conditions were triggered and why action took place over the weekend, as I outlined in my initial contribution, with a lot of people working and trying to come up with a solution.
Let me now respond to the concern raised by my right hon. Friend the Member for Greenwich and Woolwich, in relation to a particular concern of one of his constituents, about whether we are employing the same assumptions in respect of the valuer of Bradford & Bingley, as we imposed on the valuer in the case of Northern Rock. Just to recap, so that Committee members are aware, in respect of Northern Rock the valuer had to assume, first, that public support was withdrawn and no further public support was provided, secondly, that Northern Rock was not a going concern and, thirdly, that it was in administration. In the case of Bradford & Bingley, only the first assumption applies. However, it is worth noting that Northern Rock shareholders’ principal complaint is in relation to the first assumption, which is mandatory under the Banking (Special Provisions) Act 2008. That also applies to Bradford & Bingley.
Clearly, Bradford & Bingley’s position was not the same as Northern Rock’s. When it was taken into public ownership, Northern Rock had, as I have said previously, been in receipt of substantial institution-specific financial assistance for more than five months, in the form of loans from the Bank of England, and the Treasury had provided guarantee arrangements. By contrast, no Treasury guarantee arrangements had been provided for Bradford & Bingley and no facilities had been provided to it by the Bank of England that were also not open to all qualifying institutions. As a result, the decision was taken and we thought it not right to impose further assumptions beyond the mandatory assumptions in the 2008 Act. Therefore, it will be for the valuer to assess the implications of those assumptions. In all other respects, the Bradford & Bingley compensation order mirrors the Northern Rock compensation order.
On the other point that my right hon. Friend mentioned, about how creditors will be treated, it is up to the independent valuers to make decisions based on the findings and their remit. However, I do not think that his constituent should feel that his case is likely to be treated as having any less worth than the cases of constituents who have shares in Bradford & Bingley. I understand that his constituent has shares in both organisations.
Mr. Raynsford: I am grateful to my hon. Friend for that explanation. The specific concern that my constituent raised was the assumption that the position of bondholders in Bradford & Bingley was below that of others in the pecking order, in comparison with the position at Northern Rock. I do not expect an instant answer from my hon. Friend on that, but I would be grateful, if I forwarded a copy of my constituent’s letter to him, if he looked into the matter and let me know if there is any substance in that concern, and if so, what is the reason for it.
Ian Pearson: I will happily receive my right hon. Friend’s letter and make sure that it receives adequate attention, and that he gets a prompt reply.
Philip Davies: I am pleased that the Minister has agreed to do that for the right hon. Member for Greenwich and Woolwich. Many of my constituents have raised exactly the same issue with me, and I would be grateful if the Minister also responded in kind to me.
Ian Pearson: Without breaking any confidentiality with regard to my right hon. Friend’s constituent, I shall make sure that the Committee also receives a response.
Hon. Members have asked several detailed questions, which I shall try to answer. The hon. Member for Fareham asked who will pay for the compensation. I am afraid that it is the taxpayer who pays for compensation, as I am sure he knows. He also expressed the view that Bradford & Bingley is likely to do better than Northern Rock—I think that those were the words he used. That is a matter for the valuers of the two companies, and I would not be expected to comment on that. Just to be clear, however, article 3 of the order does not require the market price of the shares to be the basis of the valuation. The valuer has to look at the value of the company immediately before the transfer, excluding the benefit of any Government assistance. That is not the previous ruling market price.
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