The
Committee consisted of the following
Members:
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 societys 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 Dunfermlines 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
societys 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 Actthe 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 Dunfermlines member
business was to be transferred to Nationwide, the Banks
property transfer instrument was drafted so as to transfer all of
Dunfermlines business to Nationwide with the exception of
certain property rights and liabilities specified in the
instrument.
In
particular, Dunfermlines 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 Dunfermlines 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
Dunfermlines £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.
Why has it
taken three months to identify the problems and to correct the mistakes
that were made previously? Is there too much pressure on the Department
or is it
managing to cope with the huge amount of work that is expected of it?
The FSA and the Treasury were first alerted to the problems at the
Dunfermline building society last autumn, which was six months before
the break-up. One would think, on the surface, that there was
considerable time before that for the issue to be considered and all
the appropriate legislation to be put in place, rather than trying to
mop up after the fact. I would like to hear from the Minister whether
the Treasury can cope with the amount of work that has been demanded
from
it.
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