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That means that bodies such as Icesave are excluded. Icesave was a branch of an Icelandic bank, and branches are excluded from the Bill. None of the provisions in the
Bill would have helped the depositors of Icesave who, in some respects, are still waiting for compensation following the collapse of the Icelandic banking system.
A point that we raised in Committee, which the Minister sought to address, was that the Bill covers only deposit takers and does not take into account institutions that are fundamental to the stability of the banking system and do not accept deposits. We therefore welcome the amendments that the Government propose to table in the other place to deal with institutions that accept client assets and trade. In Committee, we discussed Lehman Brothers, where there have been significant problems with the administration arrangements because the tools are not in place to do the job. We welcome the move to amend the Bill, but I am sure that my noble Friends in the Lords will look very carefully at the amendments that the Government propose to table.
At the heart of the Bill are the increased powers being given to the tripartite authorities to intervene when a bank is failing and powers through the special resolution regime to enable them to resolve the problems of a failing bank. Part 1 sets out the special resolution regime and establishes the framework for putting a bank in the special resolution regime and the powers that can be used by the Bank of England or, where appropriate, the Treasury to deal with a failing bank. We talked extensively in Committee about the objectives of the special resolution regime. I do not particularly want to dwell on those subjects at this point, although I want to come back to the issue of financial stability later on.
Although the Bill does not rank the objectives given, it has been clear from our debates that one of the most important objectives is the protection of depositors and particularly of retail depositors. Effective arrangements to protect deposits are important if we are to ensure confidence in the banking system. We saw in the context of Northern Rock the close relationship between confidence in the banking system and the moves by depositors to withdraw their funds.
The decision to put a bank into the special resolution regime rests with the FSA, as set out in clause 7. The Bill states that a bank will be subject to the special resolution regime when it has breached the FSA’s threshold conditions, which are defined in the Financial Services and Markets Act 2000 and defined more closely in the FSA’s rule book. As currently drafted, the threshold conditions are quite broad. The Minister and I discussed the location of the head office, for example, as a threshold condition, and there are other conditions that apply to insurance companies, for example. I was grateful for the Minister’s assurance in Committee that the FSA is considering the threshold conditions.
We need to see increased clarity about what will constitute a breach of the threshold conditions. The FSA determined that the recent bank failures at Bradford & Bingley, Heritable and Kaupthing had breached the threshold conditions but, two and a half months later, we are no clearer about how they breached those conditions.
We did not make as much progress in Committee as I had hoped on the question of ensuring transparency about the use to which the Bill’s powers will be put. That transparency also applies to the threshold conditions, and I hope that the FSA will bear that in mind when it looks at the issue.
The special resolution regime established three stabilisation options—a private-sector purchaser, a bridge bank and temporary public ownership. They will be implemented through the stabilisation powers and the transfer of shares and property. The most controversial aspect of the stabilisation regime is the bridge bank, which is the vehicle that permits the partial transfer of assets and liabilities. That proposal caused the most contention between the Bill as originally drafted and as it stands now.
We have seen a form of the bridge bank in operation already, with the dismemberment of Bradford & Bingley. Its depositors and other assets were sold to Banco Santander, while the rump of the business has effectively been nationalised by being left to the taxpayer.
Some hon. Members present today did not attend the Committee stage of the Bill, so it is worth pointing out that the controversy stems from the fact that the partial transfers were regarded as a way to allow creditors’ traditional rights to be unpicked by Government action. The rights included the arrangements governing how transactions are settled in the City. Certain types of transactions are covered by agreements that enable deals to be settled on a net basis, according to their balance at the end of the day, rather than on a gross basis.
Regulatory capital is determined on the same basis, so there was widespread concern that the lack of proper safeguards could mean that there was no legal certainty that in-default transactions could be netted off. That legal uncertainty would have made London a more expensive place to do business and undermined our competitive position. That was one source of the comments made by the financial services sector when the Bill received its Second Reading.
The Government have taken on board those comments, and their moves in respect of netting off are very helpful. In principle, they are saying that we should follow the path of netting off and then considering exceptions, rather than setting out the qualifying financial contracts at the start. That change has been greeted positively by the financial services sector, and we look forward to the outcome of the consultation process in January.
Investors have also been reassured by clause 60, which provides mandatory compensation to third parties where there has been a partial transfer. It adopts the principle that no creditors should be worse off than they would have been if the bank had gone into administration or liquidation. Although that is relatively easy to say, it may be difficult to implement in practice, as the process involves a great deal of judgment by the valuer, but it gives creditors some reassurance that their rights will be properly valued.
We have touched already on the banking liaison panel set out in clause 10, which will include representatives from the tripartite authorities, the FSCS and the financial services sector, as well as people with a particular knowledge of insolvency and financial services law. I have spoken to people in the City over recent weeks and my sense is that they welcome the panel as an effective way to look at the secondary legislation that will be introduced.
As I said, the Bill is a package: in addition to the secondary legislation that will follow, it sets out in clause 5 a code of practice that will give guidance on the exercise of stabilisation powers and the bank administration
and insolvency procedures set out in parts 2 and 3. We saw an early draft of the code while the Bill was in Committee, and I am sure that a further draft will be available to Members in the other place once the consultation process is completed next month.
The code is important because it sets out the circumstances in which the powers will be used. The greater the clarity about how the powers will be used, the more confidence there will be in the operation of the overall regime, but that also means that there should be much greater transparency about why powers have been exercised.
I repeat that two and a half months have passed since Bradford & Bingley was subject to a bridge-bank type process, while Kaupthing and Heritable were put into administration at the beginning of October. However, there has not been that much in the way of greater transparency about the process through which the FSA and the Government went to get to that outcome. The financial services sector will learn a great deal from the explanation that is given about the exercise of those powers at that time, and that will enable it to predict more carefully how the powers in this Bill will be used in the future.
We have touched already on the Henry VIII clause in clause 75, and the feedback that the Minister gave on the comments from the banking liaison group was very helpful. Clearly, however, those in the other place will look at those powers, as that is an area about which they are especially concerned.
Another part of the Bill that is important in terms of the overall structure of protection for depositors deals with the changes to the FSCS. The scheme is one of the principal means by which we can protect depositors, as it gives them confidence that they will be compensated if their bank goes into administration. That needs to be thought about very carefully as the Bill proceeds through the other place, but part of the problem is that some of the detail about how deposits are to be protected will be dealt with in reforms introduced by the FSA. That is more work in progress, and it shows how difficult these matters are.
I have spent some time looking at this Bill over the past few months, and I could talk for hours about it. On this occasion, however, I shall desist from going into more detail, although I will say that more work will be done in the other place to streamline and strengthen it. The Bill is important because it should strengthen people’s confidence in the banking sector and in London as a place to do business, but it is only one of the measures needed in that regard. Other moves need to be made to restore confidence in the banking sector as a whole.
2.8 pm
Mr. Colin Breed (South-East Cornwall) (LD): I shall be brief, as I know that other hon. Members want to contribute to this relatively short debate.
It seems a long time since we were in the midst of the Northern Rock debacle, but there has been a very considerable amount of water under the bridge and to some extent the Bill’s provisions have been overtaken recently by other events. Nevertheless, the Bill is important and the Minister knows that we support it.
I do not want to say much on that, save that there are some very welcome aspects. The banking liaison group is a very positive innovation that will be helpful both now and in the future. It also cements the sort of relationship that we need with the City in respect of matters that at times can be very delicate. If we do not get our response right, the consequences could be very profound, and it is important that we bear that in mind.
The Bill does not cover important issues such as bank liquidity and capital, the appointment and qualification of directors, risk committees and so on, but they will have to be considered fairly soon. Therefore, to a certain extent this Banking Bill is just the first chapter of a continuing work in progress that we will have to keep looking at over the next few months. However, because there is a sunset clause in the Banking (Special Provisions) Act 2008, we have to put something on the stocks and the Bill can do that.
Inevitably, there are still some concerns about exactly how the provisions will work, and the hon. Member for Fareham (Mr. Hoban) has outlined them. We must hope that many of the provisions will not actually be required. If they are, we could be in a lot more difficulty. The Bill is a bit like bolting the stable door after the horse has gone, but it is extremely important nevertheless that it is on the stocks, although if we have to use some of its provisions we shall be looking at some stark situations.
We debated the amount for the Financial Services Compensation Fund in Committee and there was some disagreement about whether there should be pre-funding, which is, rightly, not on the agenda at present—clearly, the banks need all the capital they can get. One element that we did not much explore was public opinion. We have to recognise that public opinion is not particularly disposed to the provision of significantly more bail-out money. Although there are some objections to pre-funding, and even about its practicality, the industry has to realise that the idea that it can regularly come back for public bail-outs at much cost will not be sympathetically considered.
The Bill sets out protection for depositors, which is important. That security, with timely payouts, is right. It was a great shame that the vast majority of the depositors in the Northern Rock queues were already protected under the deposit fund so they did not actually need to worry. They did not know that, because the fund was not particularly well known or advertised, so we need to do some real education following the Bill to make depositors aware of their protections and of what they can expect to happen. We need to give them confidence, so that if there are some ripples they will have a clearer understanding that they are protected, and that they do not have to whiz-round suddenly and take out a few thousand pounds of their hard-earned savings.
Banks are undoubtedly one of the most capital-hungry businesses—they are always seeking capital. I have concerns that the provisions may set up some hurdles to the capital-raising exercises that will be important. Even if there are no hurdles, the process will be much more expensive than in the past, which will have an effect on the cost of money generally. We need to recognise that there will be genuine costs if banks are unable to amass
or attract the capital they will need both for their own stability and also to operate effectively for themselves and for the economy.
Mention has been made of the significant powers that have been given to the FSA and the Treasury, and there are inevitably concerns about them. The Minister has given us some reassurance, at least in respect of the Treasury powers, which is helpful, although there will always be concern about whether the FSA will use its triggers appropriately. We shall have to see. Overall, the situation is satisfactory. The thresholds for the safeguards may be a little low, but all such assessments are subjective, so it is difficult to prove one thing or the other.
Our debates on Report were truncated because of the need to prorogue. If we had had the full time, we might have reached the amendment that my hon. Friends and I tabled to deal with the necessity for a sunset clause. Just as the Banking (Special Provisions) Act was sunsetted, we shall need to revisit some of the Banking Bill’s provisions in more peaceful times, given that we have been considering it during a crisis-type situation. I hope that at some stage the Government will give our proposal some thought.
I thank the Minister and other members of the Committee. The Minister was courteous and good humoured in sometimes difficult circumstances. Overall, we support the Bill. We hope that it will be further scrutinised in the other place and that it will reach the statute book before the previous measure expires.
2.14 pm
Mr. Michael Fallon (Sevenoaks) (Con): I remind the House of my business interest recorded in the register.
I, too, welcome the Bill, and I do so for two reasons. First, it begins to put the Bank of England back at the centre of our financial system, which the Treasury Committee recommended in its major report on the Northern Rock crisis. Some of the Committee’s recommendations have found their way into the Bill; for example, streamlining the court of directors and giving the Bank more explicit power over financial stability. I hope that the Government will follow up those changes by giving the new deputy governor, Paul Tucker—whose appointment I welcome—the resources he needs to rebuild the Bank’s ability to understand what is happening in the banking markets and to monitor the financial system much more thoroughly. That is an important and long overdue change. Those powers and that ability should never have been taken away from the Bank of England.
Secondly, the Bill makes improvements to depositor protection, as the hon. Member for South-East Cornwall (Mr. Breed) said. I am not quite clear how the arrangements that the Economic Secretary proposes will be superseded by what was agreed in Brussels earlier this month. Perhaps the hon. Gentleman could clarify that. If he does not have time to answer me today, perhaps he could write to me. I understand that there will be an overarching European Union framework for the number of days before depositors are fully refunded, which may be even more leisurely than the arrangements canvassed in the UK. I should be grateful for some clarity.
We hear constant references to temporary public ownership. What is missing from the Bill is any understanding that the arrangements being made for
the ownership or part-ownership of five of our major banks will not be temporary; they will be with us for a very long time. Further legislation may be required, but I should have liked the Government to make an attempt in the Bill to set out some rules about how those public stakes are to be managed—my hon. Friend the Member for Fareham (Mr. Hoban) referred to that point. We have heard that the shareholding is to be directed by UK Financial Investments, which is to be set up as an arm’s length body, but it is not clear whether the company will require statutory approval. It is not clear how UKFI will be accountable, although I certainly hope that it will be accountable to the Select Committee. We should all understand that, although the Government keep calling this stuff temporary, it is likely to be with us for a long time, so issues such as competition policy—suspended for the nationalisation of the two Scottish banks—will need to be readdressed if we are ever again to have sufficient and proper competition in the banking system.
I have now twice said—on 17 October and during the Queen’s Speech debate—that the various measures produced to tackle the financial crisis have been necessary but are not yet sufficient. More will need to be done to get banking flowing again so that money can reach our home owners and businesses. I welcome the extension of the credit guarantee scheme earlier this week and the Treasury’s admission that it will last for five years, not three—nothing temporary about that. It could be a very permanent feature of our financial landscape. However, I suspect and fear that even those measures will not be sufficient and the Government may have to revisit some of the features of that desperately short weekend when the Scottish banks were nationalised. Of course, the due diligence was rushed, as I have already pointed out, but some of the terms set out over that weekend may have to be looked at again, because the money and the credit are not yet flowing, which everybody wants to happen.
That said, I welcome the Bill and hope that it makes it to the statute book in reasonable time, although even if it gets there in February, it will still be 18 months after the collapse of Northern Rock, which is fairly leisurely progress for a legislature that should have responded much more quickly and an Executive who are constantly behind the curve. However, I welcome the passage of the Bill today.
2.19 pm
Miss Julie Kirkbride (Bromsgrove) (Con): I, too, will keep my remarks brief. As the Economic Secretary knows, Opposition Members wholeheartedly support the Bill’s aims and have been calling on the Government to produce such a Bill for some time, and we therefore wish it a very fair and speedy passage. Of course, we want it on the statute book by February, but in the light of the Governor of the Bank of England’s remarks earlier this week, when he set out a rather worrying picture for the future of our banking industry, the best option would be for that to happen as soon as possible. It was somewhat surprising for someone in his position to make things quite so worryingly clear.
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