Mr.
Jack: It is indeed a pleasure to serve under your
chairmanship, Ms. Walley. I have three brief points that I want to put
to the
Minister. First,
the context in which the two orders are being taken raises some wider
issues about the decision-making process within a building society that
led to the situation that the orders deal with. Without debating that
at all, I want to ask the Minister, in light of the lessons that have
been learned about what happened in the Dunfermline building society,
what further examination has been undertaken of other building
societies to see if they too might have to go down this road? Clearly
some decisions were made that took the building society into the
position that the two orders seek to deal with, but it is not clear to
me whether there are any other potential customers for the schemes that
the Minister has put before us today. What work has the Treasury done
to examine the
financial well-being of other building societies in the light of the
problems that the Dunfermline building society
encountered? I
understand that under this order the Treasury has provided £1.6
billion to Nationwide as compensation for it taking over the wholesale
and retail books of the Dunfermline building society. Once that
distribution is made, I understand that the Treasury will seek to
reclaim its losses from the Financial Services Compensation Scheme.
What intrigues me is that one of the biggest contributors to that
scheme is the Nationwide itself. I am not certain how this remarkable
circularity of financial movement actually works. Perhaps the Minister
could explain how the recipient of the book will potentially be the
subject of a claim by the Treasury to repay the money that the Treasury
gave to the Nationwide in the first
place. In
the light of the fact that the Nationwide has taken on certain
commercial risks as a result of the action that it has taken, is their
any possibility that it would have further recourse to public funds in
the future, and if so, under what
circumstances? 4.53
pm
Ian
Pearson: First, let me clarify the situation that I
mentioned at the start regarding what was essentially a drafting
error—the use of “properly or reasonably” rather
than “properly and reasonably”. The order that that was
in and that was re-laid was the compensation order, it was not the No.
2 order; the No. 2 order relates to the resolution. I explained the
reasons why it was necessary to use the section 75 powers and to have a
No. 2 order. As I hopefully explained and as the hon. Member
for South-West Hertfordshire indicated, it concerned the definition of
a “commercial loan”, which was defined in the transfer
instrument as a loan to persons who are not eligible claimants under
the Financial Services Compensation Scheme, as commercial entities
would not normally be liable to compensation under it.
“Commercial mortgage loan” was defined in similar
terms.
A small
number of loans that were considered to form part of the social housing
book were also transferred to Nationwide by the property transfer
instrument, as I said, but the due diligence conducted in the weeks
after the transfer identified that a number of borrowers on the
commercial loan book were in fact eligible claimants under FSCS rules,
which means that the effect of the instrument was to transfer the loans
erroneously to Nationwide. That needed to be
corrected. Again,
on the point raised by the right hon. Member for Fylde and others,
because we were acting quickly, it was simply not possible for the
authorities to identify the detail of all the transactions. Only later,
when the facts became known, did we realise that what we had intended
to do had not been completely achieved. That is why we are debating the
No. 2
order. The
hon. Member for South-West Hertfordshire said that he did not think
that that was what section 75 was intended to do. I cannot quote myself
in the debates on the issue, although I seem to remember saying that it
was, but I can certainly quote Lord Davies on Report in the other
place. He said explicitly
that “there
may be cases where the parties all intended to achieve a particular
effect and have proceeded on the basis of that intention, but looking
at the instrument may reveal that the text itself is
ambiguous or even wrong. In such cases it may be entirely appropriate to
correct the drafting with retrospective effect to ensure that the
parties who have signed up to the resolution are indeed in the position
that they intended to be in when they gave their
agreement.”—[ Official Report, House of Lords, 3
February 2009; Vol. 707, c.
564.] Clearly,
Lord Davies was wise in anticipating the reason why we are debating
this
order. On
the progress of the sale of the bridge bank, the Bank of England
announced on 17 June that it had selected Nationwide building society
as its preferred bidder for the social housing loans and related
deposits from housing associations held by the bridge bank. That
followed a competitive auction process conducted in accordance with the
code of practice issued by HM Treasury under the Banking Act. The
transaction has yet to be concluded, and the bank will make a further
announcement in due course. Obviously, it is not appropriate to
speculate on the numbers at this stage, as that is commercially
sensitive information.
The hon.
Member for South-West Hertfordshire asked how much would be paid to
creditors and what deficit might be borne by the pension fund. Clearly,
that is a matter for KPMG, the administrator of Dunfermline. KPMG has a
website and will provide updated information in due course. We expect
creditors to make a good recovery from the administration and note that
the “no creditor worse off” safeguard will provide
comfort to pre-transfer creditors.
In respect of
valuation, article 11 of the order specifies that the independent
valuer appointed under the order is to assess the amount that would
have been likely to have been recovered by the FSCS from Dunfermline
if, immediately before the Bank of England made the transfers,
Dunfermline was in default and had entered into insolvency and the
scheme manager had paid the amount of compensation to which qualifying
claimants would have been entitled. That is relevant to assessing how
much the FSCS is required to contribute towards the cost of the
resolution of Dunfermline.
In assessing
what recoveries the FSCS would have made if Dunfermline had gone into
insolvency immediately before the Bank of England exercised its
transfer roles, the valuer must apply what could be described as
principles or assumptions. Those are set out in regulation 8(1) made
under the Financial Services and Markets Act 2000, so we did not
consider it necessary to apply the valuation principles that the valuer
is required to take into account when assessing the “no creditor
worse off” provisions listed in paragraph 9 of schedule 2 to the
draft order. I hope that the answer that I have just given is helpful.
Further and more detailed information was provided by Lord Davies to a
similar question raised by Baroness Noakes. I shall be happy to ensure
that a copy of that letter is
provided. The
hon. Member for Dunfermline and West Fife asked about the independence
of the independent valuer. The appointment panel will consist of no
fewer than four people. The draft order specifies that the chair of the
panel must be the chairman of the Institute of Chartered Accountants in
England and Wales. It does not include Scotland, but that should not be
a matter of controversy. I hope that the hon. Gentleman will take
comfort from the fact that the chairman is very much an independent
person.
In
accordance with the terms of the order, one of the members will be a
Treasury representative, but he will be a non-voting member and will
advise the panel on issues such as value for money. The other panel
members are likely to have similar expertise as those appointed to
identify other independent valuers—for example, persons with a
background in banking or commercial matters. We consider that those
arrangements will ensure that the appointment panel is, and is seen to
be, independent of the Government. That is an important consideration,
and we have responded to questions and concerns previously expressed on
the matter.
Willie
Rennie: That is reassuring. There are questions over the
process of the appointment and so on, but to have members of that
standing on the panel is helpful. Does the Minister have any idea about
the time scale? For how long is the independent valuer expected to
work, and will any time limits be imposed on the panel and the
independent
valuer?
Ian
Pearson: We want to make good progress in setting up the
panel. An advertisement process will obviously be needed. However, as
the valuer will be independent, it will be up to him to determine how
long it will take to do the required work.
The hon.
Gentleman also raised some questions on the social loan book. My
information is that Nationwide has stated that it looks forward to
supporting social housing in Scotland in a way that is consistent with
its existing approach to lending there and the rest of the United
Kingdom. The hon. Gentleman will doubtless want to talk to Nationwide
about its policies in that respect.
The right hon.
Member for Fylde asked a number of questions. In particular, he asked
about the wider implications for building societies. It would clearly
not be appropriate for me to comment on individual building societies.
However, he will be aware of the stress tests conducted by the FSA on
building societies, and the checks that are in place. The tripartite
authorities continue to work collectively to protect depositors’
interests and to maintain financial stability.
As for
recovery, we must bear in mind that we are talking about £1.6
billion, the difference between the assets that were transferred and
the liabilities involved. The Treasury will recover the funding
provided to Nationwide by the claim in the administration of
Dunfermline, which was created in place of the liabilities transferred
to Nationwide. Only then will it be necessary to seek recovery from the
financial services compensation scheme. We hope that only a small
residual claim will be needed.
I hope that I
have answered all the key points raised during this interesting
debate. Question
put and agreed
to. Resolved,
That the
Committee has considered the draft Dunfermline Building Society
Compensation Scheme, Resolution Fund and Third Party Compensation Order
2009. Draft
Amendments to Law (Resolution of Dunfermline Building
Society) (No. 2) Order
2009Resolved, That
the Committee has considered the draft Amendments to Law (Resolution of
Dunfermline Building Society) (No. 2) Order 2009.—(Ian
Pearson.) 5.5
pm Committee
rose.
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