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Session 2008 - 09
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Public Bill Committee Debates

The Committee consisted of the following Members:

Chairman: Joan Walley
Allen, Mr. Graham (Nottingham, North) (Lab)
Barlow, Ms Celia (Hove) (Lab)
Breed, Mr. Colin (South-East Cornwall) (LD)
Caborn, Mr. Richard (Sheffield, Central) (Lab)
Cox, Mr. Geoffrey (Torridge and West Devon) (Con)
Davies, Philip (Shipley) (Con)
Duddridge, James (Rochford and Southend, East) (Con)
Flint, Caroline (Don Valley) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Jack, Mr. Michael (Fylde) (Con)
Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
Mudie, Mr. George (Leeds, East) (Lab)
Murphy, Mr. Denis (Wansbeck) (Lab)
Pearson, Ian (Economic Secretary to the Treasury)
Rennie, Willie (Dunfermline and West Fife) (LD)
Riordan, Mrs. Linda (Halifax) (Lab/Co-op)
Glen McKee, Committee Clerk
† attended the Committee

Eighth Delegated Legislation Committee

Tuesday 30 June 2009

[Joan Walley in the Chair]

Draft Dunfermline Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009

4.30 pm
The Chairman: With this it will be convenient to consider the draft Amendments to Law (Resolution of Dunfermline Building Society) (No.2) Order 2009.
The Economic Secretary to the Treasury (Ian Pearson): I beg to move,
That the Committee has considered the draft Dunfermline Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009.
It is a pleasure to serve under your chairmanship, Ms Walley. Before discussing the draft compensation order, I shall explain why the Treasury decided to withdraw the draft instrument laid before Parliament on 4 June and to re-lay the instrument on 15 June. In the original version, a minor error was identified in paragraph 7(5) of schedule I. The phrase “properly or reasonably” should have been “properly and reasonably”. We did not consider it appropriate to correct the error using the correction slip process, because the correction has a substantive effect and was not an obvious error. We therefore withdrew that draft and replaced it with the present order.
Mr. Michael Jack (Fylde) (Con): Will the Minister give way on that point?
Ian Pearson: I shall be delighted to do so.
Mr. Jack: I am eternally grateful to the Minister. I understand that the orders have been discussed in another place. Does that mean that the error was approved there?
Ian Pearson: No, it does not.
Members will be aware that on 30 March, the Bank of England effected a transfer of part of Dunfermline building society’s business to Nationwide and part to a bridge bank. Dunfermline was then placed in special administration, following an application to the court. It is always sad when an institution with a distinguished history and a record of service to its local community, such as the Dunfermline had, comes to an untimely end in a way that no one would have wished. However, the decision to transfer the Dunfermline’s main business to Nationwide was made to protect depositors and safeguard financial stability, as well as to protect the interests of the taxpayer. The decision was necessary because of a significant deterioration in the society’s financial position over the past few months.
When the Bank of England exercises its property transfer powers, the Treasury is required under the Banking Act 2009 to put compensation arrangements in place. The draft order makes the following provisions. The compensation scheme deals with the transfer of business to Nationwide. The resolution fund makes provision for entitlements to the proceeds of resolution arising from the disposal of the business of the bridge bank. The third party compensation provisions provide the mechanism for assessing any compensation payable to third parties affected by each transfer, and establish the scheme for assessing any compensation payable under the “no creditor worse off” safeguard. I shall provide a broad overview of each of those components.
First, the order specifies that compensation payable to Dunfermline in respect of the transfer of the business to Nationwide should be nil. The auction process conducted by the Bank during the weekend of 28 to 30 March determined that the market value of the business was nil because the winning bidder did not pay any consideration. The Treasury therefore considered it inappropriate to engage a valuer to assess the value of the business, and exercised its discretion under section 49(2)(a) of the Banking Act to specify in the order that the compensation payable is to be nil. Secondly, the order makes provision for the arrangements for the resolution fund in relation to the transfer of business to the bridge bank. The fund is intended to act as a signal that the authorities do not intend to profit from the resolution.
Finally, the third-party compensation scheme makes provision for an independent valuer to determine two things. The first is the amount of any compensation payable to any third party affected by an application of section 38(6) of the 2009 Act—the section specifying that the property transfer instrument made by the Bank is to be disregarded in determining whether a default event provision applies; it has the effect of turning off third parties’ contractual termination rights. The second is to assess whether there is a difference between the treatment that pre-transfer creditors of Dunfermline would have received had Dunfermline gone into insolvency immediately before the transfers, and the actual treatment of those creditors arising as a result of the transfers. That is the “no creditor worse off” safeguard; it makes provision for the valuer to assess whether it is necessary for the Treasury to pay any compensation in the event that pre-transfer creditors are left worse off as a result of the transfers.
Philip Davies (Shipley) (Con): If compensation is to be paid, it will be paid by the Treasury. Given that the Treasury is appointing the valuer, does it not drive a coach and horses through the principle of the valuer being independent?
Ian Pearson: I shall answer the hon. Gentleman directly, as I was about to describe the process of appointing the independent valuer.
The Government made a commitment in January, during the Committee stage of the Banking Act, about the extent to which the appointment of the valuer would be independent of Government. On behalf of the Government, Lord Davies said:
“At every stage, the Government have been at pains to ensure that the Treasury is one stage away from decisions that relate crucially to the appointment, performance and remuneration of the independent valuer.”—[Official Report, House of Lords, 19 January 2009; Vol. 706, c. 1478.]
The order provides for the Treasury to set up an appointment panel to appoint the independent valuer. The panel will appoint the valuer, rather than making a recommendation to the Treasury on which candidate should be appointed. That further enhances the already robust independence of the appointment processes that has been used in previous circumstances.
Philip Davies: I appreciate that, but if the Treasury appoints the panel and the panel appoints the valuer, he still will not be independent.
Ian Pearson: We made it clear in the Banking Act that the role of the valuer is an independent one. I have no doubt that the appointment process, which will follow the tendering process in the normal way, will give us an independent valuer, and that he will reach his own conclusions.
I turn to the draft Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order. The order has been laid in draft under the powers in section 75 of the Banking Act 2009. Those powers enable the Treasury to make amendments to the law so as to give effect to resolutions of failing banks. As all of Dunfermline’s member business was to be transferred to Nationwide, the Bank’s property transfer instrument was drafted so as to transfer all of Dunfermline’s business to Nationwide with the exception of certain property rights and liabilities specified in the instrument.
In particular, Dunfermline’s commercial loan book, worth £660 million, was not to be included in the transfer to Nationwide. However, detailed due diligence undertaken in the weeks following the transfer demonstrated that the technical definitions adopted in the property transfer instrument led to a significant proportion of the commercial loan book being erroneously transferred to Nationwide, together with a small number of social housing loans.
The order before the Committee identifies each of the loans, which were always intended to remain with Dunfermline; the individual identification numbers are listed in a schedule to the order. The order has retrospective effect; it goes back to 8 am on Monday 30 March, the time when the transfer of Dunfermline’s assets was made. Essentially, it corrects the error in the transfer instrument as though it had never been made. The effect in law will be as though the loans had never been transferred to Nationwide.
In assessing the options to address the mistake in the transfer instrument, the Bank of England, in consultation with the Treasury, has fully considered all the commercial and contractual remedies that might have achieved the same effect as the order before the Committee today. However, we believe that the order is the appropriate way to correct the error.
Mr. Jack: The Minister has not provided an explanation of how the error happened. It is a little worrying that due diligence had to be undertaken after the event to identify that the error had occurred. Why did it occur?
Ian Pearson: A building society such as Dunfermline, which is not one of the biggest, is nevertheless a complex institution. When it became clear that it was in difficulties and that intervention was needed, we took all the steps that could have been taken and acted as quickly as possible. However, it is impossible to ensure the extent and level of due diligence required in all circumstances to enable us to find out everything about the transactions with which the company was involved. Only when further due diligence was done as part of the process did it become apparent that certain transactions had led to the original order being defective. As a result of that, we used the powers of section 75 of the Banking Act.
The Treasury is satisfied that the use of the order and its retrospective effect is necessary to ensure the completion of the Dunfermline resolution. Hon. Members who were involved in discussions on the Banking Bill will be aware that that is one of the situations in which section 75 can be used. Treasury and Bank of England officials have discussed the scope and content of the order with Nationwide and the administrators and they are content with the approach that has been adopted. I commend these orders to the Committee.
4.41 pm
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship again, Ms Walley.
I thank the Minister for explaining the reasons behind both the orders. First, let me turn to the Amendments to Law (Resolution of Dunfermline Building Society) (No. 2) Order 2009. I am grateful for his explanation as to why this is the No. 2 order. Originally the words “properly or reasonably” were contained, but it should be “properly and reasonably.” It is always a pleasure if the Government are doing anything properly or reasonably, so we understand why it was necessary to change this particular order. However, may I press the Minister to give a little more detail as to why this technical error occurred? I appreciate that this is a complex transaction, but for Dunfermline’s £660 million commercial loan book to be transferred by mistake because of errors in drafting seems to be a fairly substantial technical error, performed, I believe, by the Bank of England. Perhaps the Minister could provide greater detail. If it was the Bank of England, were external lawyers involved in the transfer? Did the Treasury have any role of oversight in respect of this?
I believe that a particular problem arose from the definition of commercial loan, which was defined in the transfer instrument as a loan to persons who were not eligible claimants under the Financial Services Compensation Scheme. That seems a somewhat strange definition in this context in that one would not expect borrowers on a commercial loan book to be eligible claimants under the Financial Services Compensation Scheme. Perhaps the Minister could explain that particular point.
I also have to say that this is a measure that was brought in under section 75 of the Banking Act 2009, which the Minister and I debated at some length during the course of the proceedings. I do not think that the Minister envisaged that section 75 would be used as a power to try to correct technical errors in property transfer instruments. I do not recall him mentioning that as something that was necessary. What I had in mind with section 75 was more to do with changes in primary legislation because of rather complicated aspects of a measure as opposed to technical errors, which, in almost any other context, would cause considerable inconvenience. I would be grateful if the Minister could say a little more about that.
The draft Dunfermline Building Society Compensation Scheme, Resolution Fund and Third Party Compensation Order 2009, as the name suggests, runs together a number of aspects. Will the Minister update the Committee on the progress of dealing with the Dunfermline building society? Does that complete the work of the bridge bank? How much will be paid into the resolution fund and what is the likely deficit to be borne by secured and unsecured creditors, including the pension fund of the building society?
Will the Minister give us some information about the different ways in which valuation for third party compensation and the amount of recovery for the purposes of contribution to costs will be measured, given that there seem to be two separate regimes? It would be helpful to know how that works. I know that there are valuation principles in respect of the recovery for the purposes of the contribution to costs. How does that work, specifically in relation to third party compensation?
I should also like to raise a point that was made in the other place. Within the order there is a limitation on third-party compensation, which is that it will be paid only if it would have been paid under the European convention on human rights. That seems to be a substantial principle point, but it was not something that I recall being debated during the passage of the Banking Act. It is not contained within that Act and yet it seems to be a restriction on third-party compensation. Will the Minister explain the purpose of that restriction? It is contained in paragraph 3 of schedule 2 to the order. Why was it not contained within the Banking Act?
Subject to those brief questions, we do not object to either of the orders; they are not, in themselves, controversial. However, it would be helpful to the Committee if we could learn where we are with regard to the building society, and what progress the Government envisage will occur in the months ahead.
4.47 pm
Willie Rennie (Dunfermline and West Fife) (LD): This is an inevitable consequence of the mistakes that were made, but also of the break up of the Dunfermline building society. Therefore, we have no great objections to the order, subject to a few questions.
Is there a scrutiny process for the independent valuer? Will it be open as to who the panel will be? Will someone independent be assessing the process subsequent to its being completed? It would be an interesting learning experience to see how the process has worked. However, I share the concerns that have been expressed by the Opposition about whether it will be truly independent. It will therefore be a real test for the Minister and the Treasury to make sure that that is the case.
The Financial Services Compensation Scheme is obviously an important factor in the matter. Is there an estimate of how much will be called upon from the scheme? Can the Minister update us when the review, which has been mooted by Lord Turner and the Chancellor, will take place? Lord Turner first committed to the review back in the Treasury Committee, when questioned by the hon. Member for Leeds, East, and gave a commitment in February that there would be a review. In March, the Chancellor gave a similar commitment that there would be a review to ensure that we get a proper balance between value and risk. I know that it has been an issue that has been explored for some time, but I would like to see the review coming forth because there is great concern among the building society community about the burden that has been placed on it from the compensation scheme. I would like to hear from the Minister regarding that.
Nationwide, as the Minister will know, was successful in bidding for the social housing loan book. People are satisfied in Dunfermline that the Nationwide will take it over because it keeps it within the Dunfermline stable; Dunfermline had a reputation on social housing. But there is some concern among the housing associations about the loans in the pipeline and whether they will be honoured by the Nationwide. I would like to hear from the Minister whether there is any detail about the commitments given by the Nationwide about those loans. The loans total about £190 million, which is a considerable amount for Scotland and the housing associations. I would like to hear whether commitments were given on that. Other than that, I have no further questions. I would like hear about the independent aspects, the Financial Services Compensation Scheme and the Nationwide social housing loan book.
4.51 pm
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