House of Commons
|Session 2008 - 09|
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Public Bill Committee Debates
The Committee consisted of the following Members:
Mr M. Hillyard, Committee Clerk
attended the Committee
Fifth Delegated Legislation Committee
Tuesday 28 April 2009
[Mr. David Amess in the Chair]The Bradford & Bingley plc Transfer of Securities and Property etc. (Amendment) Order 2009 (S.I., 2009, No. 320)
That the Committee has considered the Bradford & Bingley plc Transfer of Securities and Property etc. (Amendment) Order 2009 (S.I., 2009, No. 320).
Thank you, Mr. Amess, it is a pleasure to serve under your chairmanship. This debate stems from the fact that my right hon. and hon. Friends have prayed against the statutory instrument. I will use my opening remarks to establish why we have done so and to seek further clarification from the Minister about the statutory instrument. I would also like to point out the impact that the measure has had on the market for dated subordinated debt, which is the focal point of the instrument.
The statutory instrument was laid in a bit of a hurry on 19 February and it came into force the following day. The day after that, on 21 February, the Banking (Special Provisions) Act 2008, under which the statutory instrument was laid, expired when its sunset clause wrapped up. The Government were then able to use the powers contained in the Banking Act 2009, which came into force at the same time. Clearly the Government thought, Weve got a problem here. How do we tackle it? Lets lay this SI very quickly. It appears that they have done so without consultation with the industry. The measure has triggered a wave of concern among investors and led to some criticism of the Government by the investment community. It has also led to an adverse market reaction.
Let me give some background to the statutory instrument. It enables the directors of the now nationalised Bradford & Bingley to suspend the payment of the interest on its dated subordinated debt without triggering a default. If Bradford & Bingley had defaulted, it would have had to repay the debt in full to the bond holders. One might ask what dated subordinated debt is. It is one of the means by which banks ensure that they have adequate capital, it counts as lower tier two capital under Basel II and it pays investors interest. If a bank were to be wound up, it would rank full payment of such debt after ordinary creditors, such as depositors and the banks suppliers, but ahead of shareholders, and it is normally issued for a longer period timein excess of five years.
There is also undated subordinated debt, which has even lower priority in terms of repayment than the dated subordinated debt. As dated unsubordinated debt is perceived to be a higher risk than senior debt, it normally pays a better interest rate. It is an attractive way for banks to issue capital and it is also quite
The Governments argument for laying the SI is that they want to give the directors of Bradford & Bingley maximum freedom of manoeuvre in deciding what liabilities to pay. They also want to avoid a situation whereby a decision to repay the debt means that the subordinated debt holders are paid in preference to the Treasury and the Financial Services Compensation Scheme. As we believe that the interests of taxpayers should come first in such a situation, we will not be voting against the statutory instrument. However, the actions that the Government took in February have had consequences that I would like the Minister to comment on this afternoon.
My first question is about the process itself. Will the Minister explain why the Government tabled the statutory instrument at the last minute? As I said at the start, the SI was laid and came into force just days before the sunset clause of the Banking (Special Provisions) Act 2008 kicked in. However, the principal change to priority accorded to the debt was made in September when Bradford & Bingley was nationalised. It was then decided that the principal on the debt could not be paid before the Treasury and the FSCS had their debts satisfied.
There is nothing to indicate why the Government did not take action with regard to interest then, rather than waiting until February. No signal was given to the markets that they could expect that to take place and, as far as investors were aware, there had been no change in the external circumstances of Bradford & Bingley to suggest that that change might happen. That created an unhappy situation in the markets.
The haste to introduce this measure meant that there was very little communication with investors. As a consequence of the unhappiness of a number of investors, Lord Myners, the Financial Services Secretary, wrote to the Association of British Insurers on 25 February to explain what had happened. In his letter, Lord Myners said that the decision about whether or not to pay interest on the dated subordinated debt was one for the board and it would be considered as part of Bradford & Bingleys business plan. It is very clear from the letter that Lord Myners wrote that the board would make a decision and he said:
We would expect Bradford & Bingley to consider its strategy in relation to the dated subordinated debt in the context of the ongoing business plan, which will be finalised by the end of March.
Of course, the business plan has now been published and there is nothing in the summary of the business plan to indicate what the board will do in connection with the payment of interest on this dated subordinated debt, so markets are left in a degree of uncertainty as to what Bradford & Bingleys plans are exactly. Indeed, if Bradford & Bingley has plans, why has it not announced them? Also, if it does not intend to suspend payment of interest, why did the Treasury feel the need to lay this statutory instrument just before the Banking (Special Provisions) Act 2008 expires?
Philip Davies (Shipley) (Con): My hon. Friend is making a very good case and I agree with him wholeheartedly. He said that the Bradford & Bingley
Mr. Hoban: I am grateful to my hon. Friend for making that comment. His constituency contains the headquarters of Bradford & Bingley and I know that many of his constituents have been affected by the events at the company.
It is surprising, at one level, that the board of Bradford & Bingley has not published more extensive information on its business plan. The summary that I saw was about 12 pages long and provided very little comment and very little detail on the banks plans.
One of the comments that I have heard since I prayed against this statutory instrument is that bondholders in Bradford & Bingley would welcome more information about the plans for the company, as I am sure the employees would. Also, there was actually an improvement in the value of this debt once the business plan was published, because there was no negative indication that interest would not be paid. More information would be better. However, I am afraid that, although I am surprised that more detail has not been published, it reflects what happened at Northern Rock, where we had very little information from the board of Northern Rock as to its business plan.
Philip Davies: My hon. Friend makes a fair point. However, does he not accept that Bradford & Bingley and Northern Rock are in completely different positions? Whereas Northern Rock is still a trading company and still lending money out, Bradford & Bingley is being wound down and is no longer in the commercial market. Therefore, it is in a completely different position to that of Northern Rock. It is not providing any new lending in the way that Northern Rock is now providing.
Mr. Hoban: My hon. Friend makes an important point. I think that I would agree with him that the commercial sensitivity attached to the plans of Bradford & Bingley is less than that attached to the plans of Northern Rock. However, I am sure that there is still some commercial sensitivity there. We just need to ensure that the balance is right.
I suspect that my hon. Friend, rather like me, believes that we should have more transparency and more information rather than less. It is very easy to hide behind commercial sensitivity. I just wonder if the board of Bradford & Bingley has been as open as it could be about the future of the company, or perhaps others have rather tied the hands of the board as to how much information could be produced. Perhaps the Minister might be able to shed some light on that.
Mr. Peter Kilfoyle (Liverpool, Walton) (Lab): Before the Minister sheds light on the Governments perspective, does all this mean that the Conservative Opposition are now going to adopt a transparent approach to their own spending plans? [Laughter.]
Mr. Hoban: Mr. Amess, that was a very valiant effort by the hon. Member for Liverpool, Walton (Mr. Kilfoyle) to encourage us to be more expansive on our spending plans. I think that when the Government are perhaps more expansive on their spending plans that we might be more expansive on ours. However, I am sure that if I continued down that route, Mr. Amess, you would call me to order. Tempted as I am by the hon. Gentlemans intervention, I will return to my remarks.
One of Lord Myners arguments in his letter of 25 February, in justification for laying this statutory instrument, was that the power to vary contractual terms under the 2009 Act is more limited than that in the 2008 Act and that the 2009 Act would not enable the variation of the terms of subordinated debt. Some concerns about that have been raised in the market, because although the termsthe interest rateon subordinated debt and the repayment date might change, there could be, within the scope of the 2009 Act, a debt-for-equities swap, so that subordinated dated debt could become repayable or fixed-term preference shares. However, that would have a significant impact, because it would move that debt further down the priority order for repayment, which would reduce the value of subordinated debt and increase the cost of the funding. Is it the Ministers view that the 2009 Act allows a debt-for-equities swap on the basis that I have outlined? Does he believe that the powers under that Act would not enable institutions subject to the special resolution regime to swap directly debt for equity?
A number of market issues arose from the Governments announcement in February. First, on the value of Bradford & Bingleys debt, no guaranteed income stream the interest payments can be terminated at any time by the directors and there is no residual value, as the investors assume that there is no transfer capital repayment. Will the Minister clarify for the sake of bondholders where Bradford & Bingleys dated subordinated debt falls in the context of the compensation order that we debated previously?
Secondly, the Governments actions surprised debt markets. The spreads on dated subordinated debt widened because the Government had sent a signal to the market that dated subordinated debts were riskier assets than people had hitherto thought. What are the consequences of that? For investors holding such assets, their value was reduced at a time when the balance sheets of insurersone of the principle holders of dated subordinated debtare under pressure. As an article in Euromoney made it clear:
The key message is what it sends out to you if youre a hybrid capital bond holder in RBS or Lloyds...If one of them gets nationalised you have to assume that you are going to be holding a piece of paper that is worthless.
So as the risk increases, for investors the return needed to compensate that risk increases and the price of the assets falls. Had the Government discussed with the Financial Services Agency, prior to laying the statutory instrument, the wider impact of their decision to give Bradford & Bingleys directors the discretion to cease interest rate payments? From the point of investors, that was a significant change in the risk profile of dated subordinated debt and it had a knock-on effect on the value of assets that they hold. There is a market-wide issue here about the level of capital that insurers hold, for example. Did the Treasury discuss that with the FSA?
It is not just about the existing holdings of dated subordinated debt; it is also about what happens to future issues. If the market perception is that these are riskier assets, there may be a situation where the market will demand a higher return on dated subordinated debt. That would increase the banks costs of capital. It is important, given that the powers in the 2008 Act have now expired, that the Minister clarifies for the sake of the wider market the scope of the tripartite authorities, under the 2009 Act, to vary the terms of subordinated debt. If those powers are not there, it will reduce the uncertainty that relates to tier two capital.
Thirdly, the Minister and I discussed predictability during the debate on the Banking Bill. The financial markets were concerned that the sweeping powers in the Bill would be used to undermine legal certainty. The Government have sought to reassure them that that is not the case, through secondary legislation, which we discussed in earlier debates on statutory instruments, and also through the code of practice. For many, it is only through the actions of the tripartite authorities that people will know the use to which the Government and the authorities will put the powers in the Banking Act 2009.
The unpredicted move on debt interest unsettled the markets because it had not been flagged. I wonder what lessons the Government have learned on how to use the powers in the future. Moreover, I wonder whether it is an area in which there is scope for changing the code of practice. As we saw in an article in Euromoney about the Royal Bank of Scotland and Lloyds, there is a residual increased concern that the pieces of paper might be worthless.
Finally, the action that the Government took in connection with Bradford & Bingley was taken under the Banking (Special Provisions) Act 2008, but its powers have now expired. If the Government find any further loose ends relating to Bradford & Bingley, is there the scope under the Banking Act 2009 to tidy them up? The 2009 Act includes the concept of no creditor worse off. If an action is taken, there is provision in the Bill to compensate creditors to ensure that they are no worse off than if a bank or institution went through the usual winding-up processes as set out in the law. Will the Minister explain how that provision might apply if the decision had been taken to waive interest payments on subordinated debt under the Banking Act? Would bond holders be compensated for that?
In conclusion, the point of praying against the statutory instrument is to tease out the issues, to tackle the SIs that apply to existing dated, subordinated debt in Bradford & Bingley and to draw out the wider market implications that flow from the hasty way in which the statutory instrument was tabled just before expiration of the Banking (Special Provisions) Act 2008.
Dr. John Pugh (Southport) (LD): I apologise for turning up to the Committee a minute or two late. I hope that I did not miss too much that was valuable. I congratulate the hon. Member for Fareham for his acuity in spotting the significance in this SI. I must say that to me it looked opaque bordering on the impenetrable, but I am sure that other hon. Members have a ready
On a need-to-know basis, I understand that the SI is primarily about the orderly winding down of the residual company that is left after all the best bits Bradford & Bingley have been taken off to Santander. I understand that there are two fundamental objectives here. One is to protect the taxpayer and the other is to give clarity to existing creditors, including subordinated creditors or those holding dated, subordinated debt. I cannot judge to what extent it may do the former, but I am by no means convinced that it does the latter. In our evidence-based note, the following words are found.
The purpose of this amendment is to facilitate the orderly wind-down of Bradford & Bingley.
Bradford & Bingley has continued to make interest payments to holders of subordinated notes in the short term as if the order and the initial order had not been made. The note then says that a business plan will be published in March, which it was, and that a high level business plan, which will obviously be better, will be published shortly. I probably share the concern of the hon. Member for Fareham that it creates market uncertainty about the treatment of dated, subordinated debt, and that we must take on board the no-worse-off clause in banking legislation, so there is a case for the Minister to answer, and I hope that he will do so.
If it is any consolation to the Government, my mortgage with Bradford & Bingley is due to be paid off in a few months. I hope to do so and not become a toxic asset, but that will depend to some extent on what my Standard Life endowment policy realises. With that consolation, I should be grateful if the Minister would amplify what the statutory instrument does.
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