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The Economic Secretary to the Treasury (Ian Pearson): It has been a pleasure to serve under your chairmanship so far, Mr. Amess, and I am pleased to have the opportunity to discuss the treatment of Bradford & Bingley’s dated subordinated debt, to explain the purpose of the order, and to address the concerns expressed by the hon. Member for Fareham. He went into detail, and described the creditor hierarchy, so I do not think I need to do so.
The Treasury, with the Bank of England and the Financial Services Authority, has taken timely action to deal with specific failing financial institutions. In doing so, the tripartite authorities have consistently chosen resolution options that best meet their objectives to promote financial stability, and to protect depositors' and taxpayers’ money. When Bradford & Bingley was taken into public ownership, the Treasury and the Financial Services Compensation Scheme provided approximately £18 billion of funding to enable all retail deposits held in Bradford & Bingley to be transferred to Abbey, thereby protecting depositors' money and promoting financial stability.
The order makes it clear that amounts of principal and interest that would otherwise have become due and payable to holders of subordinated notes issued by Bradford & Bingley will not become due and payable until its debt to the Financial Services Compensation Scheme has been repaid, and only to the extent that Bradford & Bingley would remain solvent after such payments are made. As the hon. Gentleman recognises, that enables the normal creditor hierarchy to be retained. The £18 billion of funding provided by the Treasury and the Financial Services Compensation Scheme in effect replaced retail deposits, which were transferred. In the same way that the rights of retail depositors would have been senior to subordinated creditors, the rights of the Treasury and the FSCS as creditors of Bradford & Bingley rank above subordinated creditors in respect of the proceeds of the wind-down and the realisation of Bradford & Bingley's assets, as do other senior creditors.
A standard feature of subordinated debt is that it bears losses in a wind-down. Subordinated creditors receive a higher return on their debt due to the increased risk associated with their subordinated repayment ranking in the event of the issuer's default, and the hon. Gentleman recognises that. The Treasury also has a claim on the proceeds of the wind-down as Bradford & Bingley's sole shareholder, and that claim would rank below that of subordinated creditors, in the same way that it is usual for the interests of equity investors to rank below those of subordinated debt holders. In that way, the normal creditor hierarchy is retained.
The order provides that Bradford & Bingley has the option to make payments of principal and interest on the subordinated debt to the extent that Bradford & Bingley would remain solvent after such payments are made. Whether or not to defer payments of principal and interest on the dated subordinated notes remains a decision for Bradford & Bingley's board.
The order deals with the ranking of the subordinated debt if Bradford & Bingley were wound up or went into administration, and would preserve the normal creditor hierarchy. The subordinated notes would rank ahead of all unsubordinated notes whose payment hierarchy has not been affected by the order, and which in turn would rank ahead of equity.
I want to make it clear that the order relates only to Bradford & Bingley dated subordinated debt. The treatment of Bradford & Bingley dated sub-debt differs from other banks in which the Government have a stake. When the Financial Services Authority determined that Bradford & Bingley was failing to meet its threshold conditions, the Financial Services Compensation Scheme was triggered and Bradford & Bingley was put into a wind-down process in public ownership using the Banking (Special Provisions) Act 2008.
As hon. Members have remarked, the Banking Act 2009 differs in several key respects from the 2008 Act that it replaces and under which the order for Bradford & Bingley was made, particularly in that, under the 2009 Act, neither the Treasury nor the Bank of England have the power to modify the terms of subordinated debt instruments issued by a banking institution. That differs from the 2008 Act, which enabled the Treasury to make provision in an order to modify the terms of subordinated debt, which is what the current and previous orders do. With the powers now available under the 2009 Act, such as the special banking administration procedure, which the hon. Member for Fareham and I debated at great length in Committee and on the Floor of the House, it is not necessary to modify the terms of subordinated debt; the relevant objectives can be met by other means.
Consider, for example, the resolution of Dunfermline building society. With the Banking Act in force, deposits and some assets were dealt with by onward transfer in the same way as with Bradford & Bingley, but we put the rump of the company, including the subordinated debt, into administration using the Act’s bank administration procedure. In that way, the creditor hierarchy is preserved and subordinated debt bears risk ahead of senior creditors, which is what we want to see.
In an intervention, the hon. Member for Shipley, who was supported by the hon. Member for Fareham, called for the publication of the full business plan. The business plan’s executive summary was published, as we said it would be, in March 2009. The principal reason that it is not possible to publish the full business plan is, as has been alluded to, because it contains commercially sensitive information. It is right to say that Bradford & Bingley is in a different position from Northern Rock, but its business plan involves commercially sensitive information.
Furthermore, as Bradford & Bingley has a board and is managed at arm’s length, the normal procedures for parliamentary scrutiny are not necessarily appropriate. It is right that there is some degree of oversight, and Bradford & Bingley still has to disclose all relevant market information under the relevant legal requirements, so a level of scrutiny and reporting is taking place. It might not be as transparent as the hon. Members for Fareham and for Shipley would like, but as my hon. Friend the Member for Liverpool, Walton has pointed out, sometimes the Conservative party asks for transparency, but is perhaps less than transparent itself with its own policies.
Philip Davies: Will the Minister respond to the point that my hon. Friend the Member for Fareham alluded to in his comments? The Minister says that Bradford & Bingley is managed at arm’s length by the Treasury. Will he therefore clarify whether the business plan was solely the work of the Bradford & Bingley board and was produced in the way that it wanted, or whether anything in the plan was changed or inserted specifically by the Treasury? If the company is being managed at arm’s length, I presume that the plan, in its entirety and without amendment, is as the Bradford & Bingley board wants it. Is that the case?
Ian Pearson: I do not know what conversations may have taken place during the production of the business plan, but it is clearly Bradford & Bingley’s plan, and it has been approved by the company’s board. In producing a business plan, a company’s directors must be aware of all their legal responsibilities.
Dr. Pugh: Will the Minister confirm that there is the executive summary and there is the business plan itself? Is the full high-level business plan simply an amplification of the executive summary or could it introduce new conditions and terms?
Ian Pearson: I am not immediately aware of what the hon. Gentleman means when he talks about the high-level business plan. I thought that was the executive summary. I am not aware that there is another document that he is referring to, but if I have better information I will make it available to him. In terms of the arm’s length nature of the preparation of the business plan, my officials advise me that the business plan was prepared by Bradford & Bingley who in the normal way shared it with the Treasury and then the board submitted it to the Treasury which approved it.
Philip Davies: I am not sure we are any clearer. The question for the Minister to answer is, did the Minister or Treasury amend or change in any way the business plan that was put together by the Bradford & Bingley board? Is it as the Bradford & Bingley board originally produced it or did the Treasury in any way change it?
Ian Pearson: I do not have a running commentary on discussions that took place. As I indicated, Bradford & Bingley produced a business plan, shared it with the Treasury and it was approved by the Treasury. I am advised that the Treasury provided comments but did not require any changes to the business plan. If the hon. Gentleman is trying to suggest that the Treasury has been in some way heavy-handed in the production of this, I do not think he is right to do so. The board of Bradford & Bingley supports the business plan and believes it is the right policy decision.
I shall move on and answer the hon. Member for Fareham’s question about why we did not do this as part of the first order. As he would appreciate, the first order was at the heart of the immediate resolution package of 29 September. It had to be enacted extremely quickly with the immediate concern of maintaining financial stability and protecting depositors’ money. It only became clear later that an amendment was required in order to allow the normal creditor hierarchy to be retained in the current wind-up situation, thereby protecting the taxpayer. He also raised the question about lower tier two subordinated debt as a source for capital. As I hope I have made clear, the order only relates to Bradford & Bingley dated subordinate debt. Changes that have occurred to the sub-debt market have not been solely down to this order but I think reflect wider concerns. Given the current financial crisis, the role of this type of lower tier two subordinated debt has been questioned at both international and domestic levels. He will be aware of the Turner review discussion paper recently published by the FSA which raised a number of questions for discussion about whether lower tier two subordinated debt had any future role as eligible regulatory capital for systemically important banks. I want to emphasise to the hon. Member for Fareham that we do not have the powers to change the terms of subordinated debt and the Banking Act.
Mr. Hoban: Could I press the Minister on the precise nature of the concern that people have had? The concern is that the Banking Act could be used to exchange dated subordinated debt paying an interest rate of, say, 5 per cent. for preference shares, payable at the same time as the subordinated dated debt, also paying 5 per cent. coupon. That is the concern, that there could be a debt-for-equity swap, when exactly the same terms apply to the equity as apply for the debt—other than it would shift down the priority or ranking of creditors. Can the Minister confirm whether that is permissible under the Banking Act?
Ian Pearson: I know that some City lawyers, for instance, have said that actions can still be taken with regard to sub-debt through the Banking Act. However, that Act gives us a very different resolution toolkit from the Banking (Special Provisions) Act 2008. There are no powers to modify the terms of sub-debt in the Banking Act. As the hon. Gentleman is aware and as I said, since that Act has come into force, we have been required resolve Dunfermline building society. We have always sought to maintain the creditor hierarchy.
I also understand that some in the market have been claiming that the powers in the Banking Act are quite wide, but that is not the Government’s view. I refer the hon. Gentleman to the explanatory notes to the Banking Act, which describe it as a more limited power, for example, when it comes to the conversion of one form of share to another.
Mr. Hoban: This an important point. The Minister alluded to the concerns of some in the City that the powers could facilitate a debt for equity swap. He mentioned Dunfermline building society, where the sub-debt was placed effectively into administration, but he did not say explicitly that that interpretation is wrong. Is it wrong?
Ian Pearson: It is the Government’s view that there are no powers to modify the terms of subordinated debt in the Banking Act. That is our position. When we come to a different position, I will inform the hon. Gentleman, but that is our current view and our reading of the legislation as it stands.
The hon. Gentleman asked whether we can tidy up loose ends via the Banking Act now that the Banking (Special Provisions) Act 2008 is no longer in force. The latter still applies to Bradford & Bingley. The sunset clause puts only some sections out of force. Some remaining sections remain in force, but the sections that allow the modification of sub-debt are no longer in force for Bradford & Bingley.
The hon. Members for Fareham and for Southport asked about “no creditor worse off”. Again, Government action on Bradford & Bingley, when we chose the route of an orderly wind down, preserves value for all creditors, including subordinated debt holders. In addition, we have extended the scope of the compensation order, such that dated subordinate debt holders are included, which the hon. Member for Fareham raised directly in his contribution. By restoring the creditor hierarchy to its normal status, we are, in effect, ensuring that no creditor will be worse off. The hon. Gentleman will also be aware that an independent valuer will determine whether any compensation is payable.
That covers the points raised by the hon. Member for Fareham and others. I am further advised that, although officials were not quite sure what sure what he was saying—according to my notes—they will get to the bottom of it. We can indeed write to him on that, as I am sure he will appreciate. He will be aware that lots of discussions go on within the tripartite authorities and within the investment community on these matters and it is right that he aired those issues in the debate. I would like to think that we have been able, in this exchange of views, to cover most of the points that are of concern to the lawyers and accountants who follow these things very closely. If anything needs to be teased out or clarified, we will ensure that it happens.
5.10 pm
Mr. Hoban: Thank you, Mr. Amess. I am not sure what to make of the last note from the officials to the Minister. My concern still stands. In the Minister’s remarks about the powers contained in the Banking Act 2009, I sense that he was sticking to a firm line and was not going beyond that. To be crystal clear about it, the concern is this. People believe that the powers in the Banking Act enable dated subordinated debt with a fixed coupon to be replaced by preference shares that are repayable in the same time period for the same coupon or dividend. In terms of when they will be repaid, what the interest is and how much is repaid, the amount is the same. Effectively, the debt has been converted to a form of preference share. I hope that that clarifies the matter for the officials and the Minister. I look forward to their letter.
I am grateful to the hon. Member for Southport for assuring us that his mortgage is not toxic. I am sure that the Bradford & Bingley board would be grateful to know that. I do not know whether that was in the detailed business plan, which we are not allowed to see. I am also grateful to the Minister for responding to the debate so thoroughly. The measure has raised many concerns among the investment community, and that demonstrates the need to communicate clearly to market participants the purpose behind some of the powers that have been used. People become concerned when there are unexpected changes, and that is what happened in this case.
The Minister says that other factors affected the market value of dated subordinated debt. Press comments in specialist publications suggest that the Government’s action in dealing with Bradford & Bingley subordinated debt triggered a widening of the spreads. Having listened to the Minister, I hope that those spreads will narrow if the market feels reassured by what has been said. However, that demonstrates how sensitive markets are when it appears that the right to credit might be undermined. With the Minister’s reassurances in mind and having indicated earlier that I will not press the matter to a vote, I beg to ask the Committee’s leave to withdraw the motion.
Question put and agreed to.
That the Committee has considered the Bradford & Bingley plc Transfer of Securities and Property etc. (Amendment) Order 2009 (S.I., 2009, No. 320).
5.13 pm
Committee rose.
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