The
Committee consisted of the following
Members:
Chairman:
Mrs.
Joan
Humble
Binley,
Mr. Brian
(Northampton, South)
(Con)
Breed,
Mr. Colin
(South-East Cornwall)
(LD)
Cable,
Dr. Vincent
(Twickenham)
(LD)
Coffey,
Ann
(Stockport)
(Lab)
Duddridge,
James
(Rochford and Southend, East)
(Con)
Fallon,
Mr. Michael
(Sevenoaks)
(Con)
Fisher,
Mark
(Stoke-on-Trent, Central)
(Lab)
George,
Mr. Bruce
(Walsall, South)
(Lab)
Hoban,
Mr. Mark
(Fareham)
(Con)
Kawczynski,
Daniel
(Shrewsbury and Atcham)
(Con)
McCarthy-Fry,
Sarah
(Exchequer Secretary to the
Treasury)
McGuire,
Mrs. Anne
(Stirling)
(Lab)
Milburn,
Mr. Alan
(Darlington)
(Lab)
Mudie,
Mr. George
(Leeds, East)
(Lab)
Seabeck,
Alison
(Plymouth, Devonport)
(Lab)
Turner,
Dr. Desmond
(Brighton, Kemptown)
(Lab)
Chris Stanton, Committee
Clerk
attended the
Committee
Seventh
Delegated Legislation
Committee
Monday 6 July
2009
[Mrs.
Joan Humble in the
Chair]
Draft Banking Act 2009 (Restriction of Partial Property Transfers) (Amendment) Order 2009
4.30
pm
The
Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):
I beg to
move,
That
the Committee has considered the draft Banking Act 2009
(Restriction of Partial Property Transfers) (Amendment)
Order
2009.
It
is a delight to serve under your chairmanship once more,
Mrs. Humble. It seems but moments ago that we debated the
Apprenticeships, Skills, Children and Learning Bill also under your
chairmanship.
Partial
property transfers are an essential part of the authorities
toolkit, under the Banking Act 2009, for resolving failing
institutions. However, the Government have recognised that unless
proper safeguards are in place, partial transfers have the potential to
disrupt the contractual interest of counterparties and creditors of UK
banks. To this end, when the 2009 Act was passed, in February 2009, the
Government set out safeguards in secondary legislation designed to
protect contracts relevant for regulatory capital purposes. When the
safeguards were put in place, Ministers committed to continue to review
the order to establish whether more amendments would be needed to
enhance further the legal certainty that they
provide.
To
that end, the Government have engaged constructively with the banking
liaison panel and, in particular, its sub-group on safeguards, and the
Government have drawn heavily on the BLPs advice in drawing up
the draft order. The amendments build on the protections already in
place and will help to ensure legal certainty for the parties involved
in a partial transfer. In its advice to the Treasury, the BLPs
safeguards sub-group made five recommendations, which the Government
have studied carefully. On four of them we have been able to respond
positively, and the results are reflected in the draft
order.
I
shall explain why we have not taken on board the fifth recommendation.
Hon. Members who took part in the debates on the 2006 Act will recall
the set-off and netting safeguard, which is designed to ensure that a
banks set-off and netting arrangements are protected in the
event of a partial transfer. Hon. Members will also recall that
deposits covered by the Financial Services Compensation Scheme are
exempt from set-off and netting protection. That carve out from the
set-off and netting safeguard has a number of benefits. For example, it
allows the authorities to transfer the retail deposit book of a failing
institution to a solvent new institution in a short time frame. That is
important to allow the authorities to provide continuity of service to
depositors and to protect public confidence. Small companies are
included in the definition of FSCS-protected deposits, and so their
set-off and netting arrangements are not
protected.
Mr.
Mark Hoban (Fareham) (Con): If a small company is part of
a larger group, does it fall within the retail category for the
FSCS?
Sarah
McCarthy-Fry: No, but I shall come on to that. The fifth
recommendation by the BLP was to extend set-off and netting protection
to smaller companies that are part of larger
groups.
Sarah
McCarthy-Fry: Did I misunderstand the
question?
Mr.
Hoban: The Minister did, I am afraid. I asked whether a
small company that is part of a larger group is protected under the
FSCS as a retail
depositor.
Sarah
McCarthy-Fry: Yes it
is.
The
BLP sub-group on safeguards discussed and proposed a particular way in
which we could extend the set-off and netting protection to small
companies that are part of larger groups. It suggested that protection
could be provided where banks had placed an identifier on set-off and
netting arrangements with small companies that are part of larger
groups. Under its proposal, if such identifiers existed, the
authorities would have to protect the arrangements. However, the
authorities are not confident that an amendment to the safeguards order
along those lines would be workable. Furthermore, market participants
themselves were not completely confident that such identifiers could be
delivered. The Government propose, therefore, that the BLP should
continue to work on the matter over the next year, and the aim will be
to establish in the safeguards order a way of dealing with small
companies that are part of larger groups. Any proposal must address
industry concerns, while ensuring that authorities can resolve a
failing bank or building society effectively. The Government will
continue to discuss with the panel how we can make progress on that
issue.
On
the substantive provisions, the original order set out transactions
that fall under the protection of the safeguards. The amendments ensure
that the order covers the full range of transaction types that can be
included in set-off or netting arrangements. That was a matter of
concern, following the laying of the safeguards order. The Economic
Secretary to the Treasury told the House that the BLP would consider
the definition of relevant financial instruments in the order. The
amendment is the result of that
consultation.
We
are all aware that the field of activity in question is complex and
evolving, but we are confident that the definition of a relevant
financial instrument set out in the amendments is comprehensive, and
future-proofed as far as possible. Our feedback from industry is that
it is content with the new drafting.
The amendments
also clarify the legal intention that the inclusion of any excluded
right or liability, under a set-off and netting arrangement, does not
exclude the entire arrangement from protection under the safeguards
order. That is the so-called bad apple problem, arising from the
presence of the word solely in the original order.
Ministers have given assurances that the words relates solely
to are intended to prevent market
participants from wrapping up service contracts with financial
contracts, thereby gaining the protection of the order for their
service contracts.
However, there
is a difference in legal interpretation about the effect of the
drafting. Some industry participants took a quite different view of the
effect and felt that the drafting was such that the inclusion of any
excluded right or liability under a set-off and netting arrangement
would exclude the entire arrangement from the orders
protection. That was never the Governments policy intention,
and in the Governments view the drafting of the safeguarding
order did not have that legal effect. However, as there are differing
legal views about it, the Government have responded to the concerns and
removed the word solely. Our feedback from industry is
that it is happy with the result.
There is also
an amendment relating to section 34(7) of the 2009 Act which deals with
trusts. The section established that, where a property transfer
instrument makes provision about property held on trust, it may also
make provision about the terms on which the property is to be held. A
property transfer order may also make provision about how any powers,
provisions or liabilities are to be exercised after the transfer. The
purpose of the section is to ensure that a property transfer can
provide certainty of outcome, and speed of execution, in relation to
property held on
trust.
The
BLP was concerned that section 34(7) meant that trust arrangements for
any bond held by a failing bank or building society could be modified
or terminated irrespective of the consequences for the transaction,
bondholders or other interested parties. A partial property transfer
can indeed remove or alter the terms of a trust, but the amendment
makes it clear that it can do so only to the extent necessary or
expedient to transfer the trust property to the transferee. That
includes the legal or beneficial interest in the trust or any powers,
rights or obligations of the banking institution in the trust property.
Section 34(7) cannot be used to remove or alter the terms of the trust
for any other
purpose.
The
authorities can, of course, make different provision for different
cases and circumstances, and the new drafting does not prevent the
authorities from making different provision for different trusts.
However, the authorities cannot remove or alter the terms of a trust to
cherry-pick parts of the banking institutions legal or
beneficial interests or powers, rights or obligations, and the new
drafting does not give rise to doubt about that point.
Finally, the
order excludes from set-off and netting protection all publicly
tradeable securities that are not referred to or described in a netting
or set-off arrangement. At the same time, it retains protection for
securities that parties expressly rely on for netting purposes, or that
are referred to or described in such an arrangement. The benefit of
that is legal certainty for all parties involved in a partial transfer.
The authorities will be able to transfer all the securities that
parties believe should be transferred, while avoiding the risk of
inadvertently breaching the safeguards in doing
so.
The
amendments meet the vast majority of the markets concerns, and
demonstrate that the Government are committed to working with the
industry to ensure that the regime is as effective as possible. The
Government want to thank the BLP and in particular its sub-group on
safeguards for its hard work and thorough
advice.
4.39
pm
Mr.
Hoban: It is a pleasure to serve under your chairmanship,
Mrs. Humble. I think that only the hon. Member for
South-East Cornwall and I are veterans of the Banking Act 2009, the
debate that we had during its passage and the numerous statutory
instruments that have flown from it over the past few months.
Back in
February, we debated the order that we are amending today. It is worth
putting on record why this statutory instrument and the one that it
amends are so important. When the Banking Bill was first published, a
concern arose that it appeared to give the tripartite authority the
right to disrupt the traditional arrangements in the market that enable
banks and other counterparties to net off their assets and liabilities
for transactions with others in the market.
The Minister
touched briefly on why the matter is so important: it is about
regulatory capital. If transactions between two counterparties can be
netted off, the amount of regulatory capital that an institution must
hold is significantly less. When I spoke to some financial institutions
during the debate on the Banking Bill, they pointed out how important
it was that the issue should be properly resolved and the right
safeguards put in place, as doubt about whether they had to account for
the transactions on a gross basis made London a significantly less
attractive place to do business. It is right to have safeguards. It is
part of the architecture surrounding the Banking Bill; the right to
disrupt those relationships was set out in primary legislation, and the
protection comes in the secondary legislation.
I remember
debating the word solely in the Committee that
considered the order that we are amending. The then Minister said,
Well, we dont think it makes any difference, but okay,
well amend it just to keep you happy. What is
demonstrated is the level of interest and concern about getting the
arrangements absolutely right and precise, so that there can be no
doubt, when looking at such transactions, whether netting
off applies.
The banking
liaison panel was set up under section 10 of the 2009 Act to give the
Government advice on how the measures could work in practice, as well
as to reflect the fact that changes in market practice might require
the statutory instruments to be updated from time to time. As the
Minister said, the statutory instrument before us is a product of the
panels safeguards sub-committee. Anyone who has taken the
trouble to read its advice to the Treasury, published on 17 June 2009,
will see that it has done its job, and addressed the issues,
thoroughly. The first item that it raised was the small companies
carve-out, to which she referred. The panel has clearly put a great
deal of thought and effort into the advice. There are four and a half
pages of detailed analysis explaining why it feels that the carve-out
should not apply to small companies that are part of
groups.
It is
disappointing that in the explanatory memorandum to the statutory
instrument, which I think is the only formal response to the
BLPs work, the Government devote two paragraphs to its very
reasoned argument. If committee members are to feel that the
Government value their advice, they need a bit better justification
as to why their proposed changes should not go
ahead than two paragraphs in an explanatory
memorandum.
I
am not sure that the argument given in paragraph 8.4 of the
explanatory memorandum passes the credibility test. It
says:
The
primary reason for this is that banking institutions do not generally
hold the information necessary to identify a small company that is part
of a large group that has a set-off or netting agreement with the
banking institution; and given this lack of information, it is not
currently possible to identify such a company quickly in the context of
a resolution under the
SRR.
I
do not believe that to be the case. It says something about the
appalling state of bank records. If a bank has entered into a legal
agreement with a customer and said, These are the companies
where there is a set-off between the accounts, one would think
that the bank would have a record that would be applied to those
accounts. The fact that they have not shows very poor record-keeping,
and it is surprising that the Government have accepted that as a reason
not to proceed with the BLPs recommendation.
The Government
should have been tougher with the banks and said, You should
apply this identifier to those accounts. You should make sure your
records reflect your legal agreement with one of your
customers. I am sure that companies would have a record showing
where the right of set off applies in the various companies in their
group.
The Minister
should push the matter back on the banking sector and say that that is
not a good enough explanation. If she was fobbed off with that
explanation, she should go back to her civil servants and say that we
need a better and more reasoned justification for arguing against the
changes that the BLP suggested in its well-argued and well-reasoned
report of 17 June.
The reason for
the retail carve-outI raised this in my question to the
Minister about the Financial Services Compensation Schemeis
that small companies are covered by the FSCS. I had not appreciated the
fact that a small company that was part of a larger group would be
compensated, even though it was part of a larger group, and a
commercial decision had been taken to create and run that group of
companies. That creates an incentive for groups to reduce the size of
their companies so that they fall within the FSCS limits. Something is
not quite right with that.
I know that
the Government are not responsible for the FSCS rules, which are the
responsibility of the Financial Services Authority, but there is an
issue to consider. In tax, as the Minister and I know from discussing
the Finance Bill, and in company law where a small company is part of a
larger group, the fact that it is part of a larger group takes
precedence over the fact that it is a small company. There seems to be
a disconnect in the treatment as set out in the order, which we need to
think about very carefully.
The
Treasurys explanation of why it has not adopted the
BLPs view about carve-outs for small companies is simply not
sufficiently robust to stand proper scrutiny, and the Government should
think again about it. Can they not give a better explanation
for rejecting the BLPs view than simply saying that
banks are not up to the job?
4.47
pm
Mr.
Colin Breed (South-East Cornwall) (LD): I entirely agree
with the assessment by the hon. Member for Fareham of the explanation
in paragraph 8.4 of the
explanatory memorandum. Having spent something like 30 years in banking
at branch and regional office level, I have no doubt that if a bank put
down notice to all its branches to do the necessary returns, there
would be a relatively small number, and the companies involved could be
easily identified and brought in. I therefore have to ask what the
banks motivation is for trying to avoid doing thatI
cannot quite think what it is, but there obviously is a reason, because
they could do it quite easily.
It is
absolutely right that we should push back on the banks the need to come
up with clear reasons why companies cannot be easily identified. At the
very minimum, banks should, if they do not, advise groups that
particular small companies are not covered by the provisions. The very
fact of having to do that would mean that they had to identify those
companies, and if they had to do that, they would have to make clear
their rights and responsibilities.
I am happy
that the BLP has pushed this issue. It has done some really good work.
When we looked at the Finance Bill, we knew that a lot of work would
have to be done on the issue, and it has clearly been done. However, we
are talking about a relatively small aspect, and the
Governments explanation does not hold water. We need a much
clearer understanding of why the banks seem unable to identify the
relatively small number of groups that would be affected by the
provisions.
4.49
pm
Mr.
Michael Fallon (Sevenoaks) (Con): I want to add to the
points that have been made. First, I welcome the deletion of the word
solely. I do not want to criticise the Minister,
because she is relatively new to all this, and I admire the way in
which she has picked it all up. However, there was an element of bad
grace about the explanation, given that the Treasury still thought that
its drafting was right, when lots of other people clearly thought that
it was wrong. None the less, the word solely has
gone.
I am also not
very impressed with the explanatory memorandum. I assume that the
declaration on the European convention on human rights applies to the
amendment order as well as to the original order, but that is not clear
from paragraph 6.1, which refers only to the original
order.
On
the big point about small companies, I agree with my hon. Friend the
Member for Fareham. The banking liaison panel thought the measure was
right and that the arguments were compelling in principle. It is not
quite enough for the Minister to fall back on the question of whether
it is workable. Could it be workable? Does she accept the principle
that small companies should be entitled to some setting-off and netting
protection? That is an issue of principle. If she would simply say that
she accepts that in principle and that the proposal does not seem to
work because of the lack of information, that would be fine. It would
be good to have on the record whether she accepts that those companies
should be entitled to such protection in principle.
Finally, this
is now becoming a process. Perhaps those involved in the 2009 Act as it
went through Parliament always knew that this would happen, but I was
not clear that one order would be laid four months after another. If
that is going to continuethe banking
liaison panel has been invited to continue its work with the
Treasurywe may need to put the panel on a slightly more formal
basis, to ensure, for example, that its minutes and advice are
published quarterly, before any amendment order is made, so that we
know exactly what advice it has given to the Government. That said, I
welcome the amendment
order.
4.52
pm
Sarah
McCarthy-Fry: I am glad that hon. Members in general
welcome the amendment order. I note that partial property transfers are
an essential part of the authorities toolkit for resolving
failing institutions, but we also need legal certainty and market
confidence that the safeguards order provides adequate
protection.
The
explanatory memorandum was a bit short. It was never intended to
constitute the Treasurys full response to the BLP, and we will
be engaging in further work with the BLP on the matter, as I made
clear.
Mr.
Hoban: Is this the only current response to the
BLPs work?
Sarah
McCarthy-Fry: It is to my knowledge, but perhaps someone
has more information on that. I have not seen any other response, but
there may well have been, and I will hopefully be able to respond to
the hon. Gentleman before the end of the Committee. If not, I will
write to
him.
Mr.
Hoban: Given the emphasis that has been placed on
the statutory panel, it is important that the responses to its reports
and advice are more than simply explanatory notes to statutory
instruments. It is now 6 July, and we are dealing with an SI relating
to advice that was given on 17 June. Doubtless the Treasury has an
observer on this, but perhaps a little more time should be spent
considering the advice, rather than simply trying to ram a measure
through before the summer recess.
Sarah
McCarthy-Fry: But it was the panels wish that the
amendments were made before the summer recess, so that we get the
safeguards in place as quickly as possible. Indeed, Ministers committed
to getting the measure in place before the summer recess. We know that
there is more work to be done on small companies, but it is important
that we have the other things on the statute book before that
time.
The hon.
Members for Fareham and for South-East Cornwall said that they did not
see why the banks did not hold such information. They may well hold
that information, but our difficulty is whether it is possible to get
the information quickly enough in the course of a resolution. The BLP
members spoke to the banks about that, and the point will be addressed
as part of the ongoing work.
I can see
strong advantages in the principle that the hon. Member for Sevenoaks
described, and we will work on that with the panel to see whether we
can find a practical way forward. In addition, the human rights
declaration applies to both the amendment order and the original order,
which was my feeling in the first place.
The banking
liaison panel meets quarterly. Minutes will be approved at its next
meeting and will be published, and we will publish terms of reference
with the panel, so obviously the process will be ongoing. This order
enhances protection for banks and their counterparties. I hope that we
can agree it today. As I have said, we will continue to monitor the
market impact of the 2009 Act and its related secondary legislation.
Mr.
Hoban: Is the Minister saying that the only barrier to
implementing the small companies element of the banking liaison
panels advice is the identifier? If the identifier were in
place, would the Government implement that part of its
advice?
Sarah
McCarthy-Fry: It may be that the identifier is not the
best way to proceed; there may be better ways. We have to look at the
principle of how we deal with bank resolutions; they often have to be
done very quicklyoften over a weekend. I want to give the
banking liaison panel and the industry time to come forward with the
best way for us to do that.
I thank all
members of the Committee for their constructive comments on the order.
The panel will continue to advise the Government on any possible
changes in the future, and I am sure that we will return to the
issues.
Question
put and agreed to.
4.56
pm
Committee
rose.