Mr.
Kilfoyle: As the Opposition spokesman said, he raised a
lot of detailed points. That is not what I intend to do. Unlike the
Minister and my right hon. Friend the Member for Oxford, East, I have
never had the undoubted pleasure of initiation into the allegedly
esoteric mysteries of Treasury thinking. As a layman, two things struck
me when listening to the Minister and the Opposition spokesman, and I
should like the Minister to answer two simple questions. First, the
order is a small, albeit significant, step in strengthening the
regulation of the bête noire in a modern economy—a faulty
banking world. Will he confirm that it is viewed as a small step in
that direction?
I referred
earlier to the stakeholders and those who have been consulted. No one
would have misgivings about consulting banks such as HSBC or Standard
Chartered, which have conducted themselves with professionalism,
efficiency and dignity in recent times. However, the idea that
there would be consultation with some of the other bandits in the
banking world seems akin to asking the Kray twins for advice on
mediation. 10.31
am Dr.
John Pugh (Southport) (LD): It is a pleasure to serve
under your chairmanship, Mr. Gale, in the proceedings on the
Banking Act 2009 (Third Party Compensation Arrangements for Partial
Property Transfers) regulations 2009, although I am sure that both of
us accept that life does at times afford even greater pleasure. Having
been involved intermittently with the Banking Bill, I want first to
make two observations. Whatever the Minister’s prior knowledge
of the matter, he has surely now become the world expert in partial
transfers in banks, an issue that showed up quite early in our
discussions on netting when we considered the Banking Bill.
Furthermore,
the secondary legislation is meant to be, and has been described by the
Minister as, a work of co-production, which, if achieved, would give
those who oppose it less scope to quibble, carp and criticise, although
I accept that the hon. Member for Liverpool, Walton has even found a
way of getting round that. I am aware that extensive consultation has
taken place, perhaps not with all the parties that should have been
involved, but certainly with the financial services industry and the
expert liaison group, now the banking liaison panel, throughout and
beyond the passage of the Banking
Bill. Fundamentally,
partial transfer is a matter of both economics and ethics. If it is to
occur, there must be clarity about how it is done and, as fairness is
important, clear indications of how it is to be done. Not to have
either weakens confidence in the financial sector as a whole, a point
that is made in the explanatory notes. Clarity is lost if the rules for
netting off and setting off property transfers are unclear, and there
has been some doubt about that. Fairness is lost if the Government
ignore genuine
rights. The
powers under the Banking Bill can be exercised only if a bank faces
insolvency. The agreed method is to divide the bank, if it is a partial
transfer, into a resco—not a word that I like very much because
it means a residual bank, and could easily be confused with a rescued
bank—and a newco, which is presumably paralleled by a division
of the assets into toxic and non-toxic kinds. Investors in the newco
will obviously end up happier, because they are the rescued party.
Investors in the resco will
not. The
statutory instrument is designed to ensure that the latter group
suffers no more than they would have done if the inevitable had
happened and whole bank insolvency had occurred. Litigation could then
be about only whether the partial transfer prevented total insolvency
or whether some other outcome could have been anticipated. The order
hopes to ensure that the liabilities and, thus, the rights of the resco
creditors are respected.
There is no doubt that they are discriminated against compared with the
newco. I am certain that they would sooner be saved than not
saved. However,
the Government are doing no favours to either because it is a case, in
a sense, of a bank imploding, and newco and resco counterparties are
similarly exposed, and discrimination in the interests of the wider
economy—the point of a partial transfer—is justified. It
is like a charitable act when non-recipients can make no particular
claim. The key point is that the Government’s action should not
cause more harm than could have caused by insolvency. If it does, they
should offer compensation, and that is the general thrust of the
statutory instrument. As a consequence, all the provisions fall into
place. There
is provision for assessment of third-party liabilities in the round to
include netting as well as a less elegant or less adequate assessment
of liabilities, including—the Minister might confirm that this
issue was raised by the Conservatives in an earlier debate—where
a third party has assets in both the newco and the resco, in the
surviving bank and the residual bank, or the transfer bank and the
residual bank.
An important
part of the regulation for independent valuation, which was brought up
in the debate and is subsequent to the initial Bill being drafted, is
the recognition that insolvency procedures can differ and that
hypothetical insolvency can take one of several routes and not
necessarily the route that the Government would favour in making a
partial transfer. It is a recognition that the Government cannot allow
for the effects of foreign
jurisdiction. I
can see no fundamental flaw in the work of co-production, though
provision should be made to review its hopefully infrequent
application. I will not quibble about the detail, which would simply
lead back into the discussions that the Treasury is already having with
the banking industry as a whole. But I do not want to legitimate the
growing practice of administrative carve-ups in other areas—the
so-called pre-packed administrations and the like—where newcos
emerge and the company simply throws off unprofitable sectors like
ballast.
I do not want
to encourage a one-sided approach by the banks to the big issue of
netting. Having netting when it suits them, and having been saved by
the taxpayer, they are in danger of replicating the biblical parable of
the unjust steward. I will close with a simple example: Garrick, an
engineering firm in my constituency, is being chased and threatened by
Barclays, who in turn audited and foreclosed on one of their suppliers,
leaving Barclays in credit. They bumped up the liabilities of one
client and caused a liquidity crisis for another. They did not then
talk about
netting. 10.37
am
Ian
Pearson: I shall try to respond to the points made by the
hon. Members for Fareham and for Southport and my hon. Friend the
Member for Liverpool, Walton. The hon. Member for Fareham raised a
number of issues on relevant financial interests, the definition of the
word “solely”, foreign property, small firms and
deposits, the issue of transparency and the “no creditor worse
off” provisions. I will come to those in a moment.
First, let me respond to my hon. Friend the Member for
Liverpool, Walton, who raised a point about strengthening
regulation.
In essence,
what we are discussing is relatively narrow. We are considering the
situation where a decision has been taken to use one of the instruments
in the special resolution regime in an instance where there has been a
failing bank, and it is regarded as necessary for there to be partial
property transfers. We hope that that situation will not occur because
of the regulatory regime that the Government are seeking to strengthen.
However, if it is necessary to take such actions, it is right and
proper that we do so in a way that does not damage other aspects of the
financial system, which would defeat the object of what we are trying
to ensure, which is the financial stability of the UK system as a
whole. That is why it is important that the safeguards ensure that we
are not potentially damaging transactions. As has been pointed out, if
we do not get the safeguards right there is a danger that we will in
effect be increasing the regulatory capital requirements of banks and
making life more difficult at this point in time. No one wants to do
that. The
hon. Member for Southport suggested that I might be an expert in this
matter. I am no expert, but I have developed a rather greater
knowledge of safety arrangements, master netting agreements and a range
of complex financial transactions than I ever thought I would
during my parliamentary career.
There will be
a robust process to ensure that we have appropriate legislation. As I
hope I have explained to the Committee, some of the issues raised are
the subject of complicated legal arguments by lawyers who have
differing views. That is one of the reasons why I have been keen to
talk about co-production of secondary legislation; I want to ensure
agreement about the best way forward.
We wish to
achieve certain policy objectives. Having been clear about those, we
want to ensure that the law put in place to achieve them is not
defective in any way and does not cause unintended consequences to the
markets. That is why we have been working with the expert liaison
group—now the banking liaison panel—and why I have
committed to continue working with it on issues such as partial
property transfer safeguards.
Let me
respond to the comments made by the hon. Member for Fareham. I
appreciate the points that he made on relevant financial instruments.
As I indicated in my opening remarks, we are aware of the existing
concerns. We understand that those concerns are primarily related to
technical drafting, and there are various interpretations about whether
some relevant financial contracts have been excluded by using the MiFID
definitions.
We amended
the drafting of the order to address the core concerns relating to
relevant financial instruments, in particular the need for the order to
cover loans. As part of our existing commitment to work in partnership,
the banking liaison panel will review the safeguards order. If it is
clear that changes are desirable, we will make them before the summer
recess.
The hon.
Gentleman also referred to the fact that the legislation uses the words
“relates solely to”. That point has been made by those
who follow these matters closely. I reiterate that it is not the
Government’s policy intention for the existence of one excluded
contract under a set-off and netting arrangement to render the entire
arrangement unprotected by the order. One bad apple does not spoil the
barrel. The Government’s view is that “relates solely
to” in the drafting of the safeguard order
does not yield that legal effect. However, as with other outstanding
stakeholder concerns, I confirm that that will be part of the banking
liaison panel’s review. If further clarity in the legislation is
needed, we will seek to achieve that. Mr.
Hoban: If the use of the word “solely” does
not have the intention that people believe it to have, what is the
reason for including it in sub-paragraph
(c)?
Ian
Pearson: I cannot comment technically on why it has been
drafted that way. However, the banking liaison panel and the lawyers
involved, and our own lawyers, will be happy to look at the matter. As
long as the policy intention is clear—and I think it
is—we will ensure that the legal effect is clear as
well.
The hon.
Gentleman also raised the issue of foreign property. I appreciate his
acknowledgment that changes have already been made. Foreign property is
not carved out of the safeguard. We think that the likelihood of
foreign banks withdrawing from lending to UK banks due to the
formulation of the safeguard is very small. We formulated the
safeguards to ensure that the UK authorities have the necessary
flexibility to make partial transfers of failing banks in the interests
of financial stability and of reducing risk to the UK
taxpayer. We
have taken that position for the following reasons: first, to emphasise
again that foreign property is not carved out of the set-off and
netting safeguard. The order simply states that if the UK
authorities’ attempt to transfer is not successful due to the
failure of a foreign court to recognise the transfer, it does not
constitute a breach of the order, by virtue of not all the relevant
property rights or liabilities being transferred. Foreign
counterparties are likely to want to be transferred, and they ought to
be able to take action before their local courts to get a transfer
recognised. Counterparties may write into their contracts the need for
a foreign bank to recognise a transfer under the SRR. A partial
transfer under the SRR is almost certainly a reorganisation measure
under the credit institutions winding up directive. As such, states in
the European economic area are required to recognise the transfer. I
hope that that clarification is
helpful. The
hon. Gentleman also raised points that refer specifically to some small
firms that already use set-off and netting due to their status as being
eligible under the financial services compensation scheme. In making
the order, we needed to strike a balance between ensuring that it can
deliver vital continuity of service and liquidity for small services in
the event of their bank failing, and suitable protection for the more
advanced risk protection and mitigation techniques that may exist
between larger firms and their banks. For that reason, a carve-out from
the netting protection for all FSCS eligible depositors, including
small companies, is appropriate to allow the authorities to effectively
provide continuity of services for those
depositors. We
are, however, aware that some stakeholders believe that the combination
of the carve-out and the FSA’s interpretation of the relevant
European rules could lead to firms requiring more regulatory capital.
We are investigating that concern, and we are aware that there will be
a meeting between the FSA and the banks on that topic soon.
Irrespective of the FSA’s position,
I know that it is a commercial decision for banks to make, on how they
meet the increased regulatory capital costs. We will watch developments
in that area carefully, and, as I have already indicated, the issue can
be picked up as part of the banking liaison panel
review. Mr.
Hoban: I know that the FSA and the banks are meeting
shortly to discuss the issue, but the Minister will be aware, much as
anybody will, that if the result is that the amount of regulatory
capital that banks have to hold increases, there will be a potential
knock-on effect on lending to small businesses—it will harm
them. This is a difficult balancing act. The Minister talked about
striking the right balance between continuity of service and the wider
impact. Did the Government think through the inclusion of small
businesses in the definition of eligible claimants and the impact on
capital
requirements?
Ian
Pearson: Yes, we did think that through. There is a clear
view from the Government that we do not want to put any obstacles in
the way of ensuring that small businesses get access to the lending
that they need, particularly at such a difficult time in the economic
cycle. I appreciate the concern that it might affect banks’
regulatory capital. We have to await the discussions between the FSA
and representatives from the banks, but we can return to the matter
through the banking liaison panel, as the hon. Gentleman knows and, I
think,
supports.
Mr.
Hoban: One of the comments from some of the trade bodies
was that the FSA’s intervention in this area arose late on in
the process. When did the FSA first raise with the Treasury its
concerns about the impact on capital of the inclusion of small
businesses in the definition of retail
customers?
Ian
Pearson: I do not have the detail about dates. This has
been an ongoing process, which has been worked through by all those who
share an interest. The key thing here is to make sure that we clarify
matters and do not do anything that will disadvantage small businesses
in the short term. That is certainly the policy
intention. In
terms of transparency, which gets to the hon. Gentleman’s
earlier point, we shall publish a narrative of how the responses that
we received to the 6 November consultation document fed into the
statutory instruments before us today. Further, we shall ask the
banking liaison panel to consent to the publication of its
minutes, as the expert liaison group did before it. I recognise the
concerns of people who, rightly, want to know what is going on and
might not feel as close to matters as they want to be, because they are
not members of the banking liaison panel. We shall do all that we can
to try and make sure that those concerns are addressed and that there
is as much transparency as is practicable and sensible.
The hon.
Gentleman raised a point on the “no creditor worse off”
valuation principles. He made two points, on the first of which it is
right to say that the industry has been largely reassured by the
“no creditor worse off” provisions, so that a lot of the
debate has been on the partial transfer safeguards rather than on the
regulations. It is important to make the point that the provisions are
included so that we can help to expedite the valuer’s work; for
example, by enabling him or her to assume that a division of a failing
bank has been sold at a certain price if that division had been sold as
part of the resolution. If the valuer’s work is expedited in
that way, creditors will get their compensation, if any is due,
earlier.
Stakeholders
told us that they believed that the safeguard would benefit from
options that would allow a more expedited process to deliver
compensation. As a result, we tried to deliver that. The regulations
also provide for interim payments to be made to creditors. The
independent valuer is required to have regard to the sums that affected
bank’s creditors believe that they are due under the “no
creditor worse off” procedure. In addition, there are various
provisions that help guarantee the valuer’s
independence. The
hon. Gentleman also asked about the process of choosing the valuer. The
process is the same as that in the Banking Act. The Government will set
up an appointing person or panel to act as a valuer. If we cast our
minds back, we will remember some of the debates that we had about how
that
operates. Finally,
the Government recognise that the provisions are detailed and complex.
It is right that they have been implemented, because we need to bring
about legal certainty in financial markets on how the safeguards will
operate. I think that we probably have them 99 per cent. right. There
are some residual concerns out there, mostly technical ones from
different groups of lawyers. I have undertaken today that the banking
liaison panel, as its first act, will look at the partial property
transfer safeguards order, to see whether further changes need to be
made. If so, we shall introduce them before the summer recess, to give
greater certainty, which is a clear and important objective for us
all. Question
put and agreed
to. Resolved, That
the Committee has considered the Banking Act 2009 (Restriction of
Partial Property Transfers) Order 2009 (S.I. 2009, No.
322). Banking
Act 2009 (Third Party Compensation Arrangements for Partial Property
Transfers) Regulations
2009Resolved, That
the Committee has considered the Banking Act 2009 (Third Party
Compensation Arrangements for Partial Property Transfers) Regulations
2009 (S.I. 2009, No. 319).—(Ian
Pearson.) 10.55
am Committee
rose.
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