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“the continuity of banking services”
to the objectives, because in Committee in this House I introduced an amendment to incorporate the continuity of banking services into one of the objectives of the special resolution regime. It therefore seems that the message eventually sank in that it is important to make sure that there is a reference to the continuity of banking services in those objectives. This is an important matter, and I wish to consider it briefly.
One of the contrasts in how different events have been handled over the past few months is in terms of the continuity of banking services. Depositors with some of the Icelandic banks—such as those who found their accounts flipped across from Kaupthing or Landsbanki to ING—will have seen the continuity of services in action, in that they were able to access their money almost immediately. However, those depositors who were not with the internet banking arm of those two Icelandic banks had to await payment through the Financial Services Compensation Scheme, and it took several weeks for them to receive their money. Clearly, if we want to give people confidence in the financial system, the fact that we can demonstrate that there is continuity of service is an important way of responding to their concerns. That would help in giving depositors a sense of confidence in how problems will be handled in future. I am therefore glad that there will be a reference to the continuity of banking services in the objectives.
One feature of this debate, which we have now been having since autumn last year, is the banking reform package that has been proposed. It has three elements: the Bill that is before the House today, the secondary legislation that will be brought forward at the appropriate time, and the code of practice. The package needs to be looked at altogether. The Bill gives significant powers to the Government, secondary legislation will implement them, and the code of practice is important in giving confidence to the banks and other financial institutions and their advisers about how the powers will be used in practice. They can take comfort from the code as to how the powers will be applied in future. We spent a great deal of time in Committee discussing the code of practice. The Minister ensured that we saw a draft of it then, and I was grateful to him for doing so. Lords amendments 2, 3 and 4 are important in that they increase the comprehensive nature and coverage of the code of practice to ensure that the objectives themselves are understood. The Bill’s original drafting said that the code could provide guidance on
“how to achieve the special resolution objectives”.
Lords amendment 2 inserts the word “understood” into the provision to ensure that there is a clear link between the objectives in the Bill and the way in which the Government will seek to achieve them once it is enacted.
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As the Minister pointed out, significant debate took place in Committee about the stabilisation options and what preference there would be in terms of their use. I tabled an amendment in Committee ranking those options in order of preference, with a private sector solution
coming first, a bridge bank second and temporary public ownership or nationalisation as the final preference. Although he listened to my proposal, he rebuffed it on that occasion. We wanted to help people understand how the stabilisation options would work and what factors the Government would bear in mind when considering which option to use to deal with a bank crisis.
Lords amendment 4 inserts more specific guidance on clauses 63 and 66, and on the compensation clauses—those are welcome additions to the remit of the code. Continuity of service is a very important concept in protecting consumers. Clauses 63 and 66 look at continuity of service in a different way, by imposing service obligations on contractors or other suppliers where there has been a share or property transfer, which is part of the means by which the stabilisation options are put into practice. There was concern as to how those provisions would work, and the fact that they are to be included in the code of practice helps in establishing that.
The second part of that amendment relates to the important issue of compensation. The Bill gives the Government significant powers to vary the rights of creditors—people who have entered into a borrowing or lending relationship with the bank or the shareholders, or with suppliers. Normally, suppliers would be able to enter into a contract whereby if there is a significant change in the person with whom they are contracting, they would have an option to terminate the contract, but that goes against the thread running through this Bill of minimising disruption to the financial system and ensuring continuity of service. It is important for suppliers to know what will happen when these powers are invoked, and it is right that that exercise is reflected through the code of practice.
On Lords amendments 5 and 6, the Minister at an early stage identified the importance of expert advice and guidance on this Bill. This House is dealing with complex and wide-ranging powers in this Bill, and it was right to ensure the liaison panel’s involvement in its evolution over the past few months. I know that a number of discussions have taken place between the Treasury and the members of that panel about the Bill and the secondary legislation. The ongoing engagement between the Treasury and the various experts is welcome, and we are pleased to see the extension of the group’s remit. We want things such as the impact of the special resolution regime on banks, their customers and the financial markets to be examined, because the purpose of the code, the panel and so on is to ensure that this legislation does not damage the UK’s financial markets, but strengthens them. The best way to do that is to ensure that there is proper engagement with outside interest groups, and Lords amendments 5 and 6 put the panel’s future involvement on a statutory basis.
I wish to press the Minister on one aspect of the panel. My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) asked whether the minutes of the panel would be published—whether there would be some more transparency about its deliberations and contributions to the formation of legislation, and its future role. The Minister said that he had no specific objection to this, barring concerns about market sensitivity, and would go away to reflect.
Ian Pearson: My view is that this is a matter for the banking liaison panel—if it wants to publish its minutes in full or in a truncated version, it should be allowed to do so.
Mr. Hoban: I am grateful to the Minister for that response. It shows a degree of openness, and that is important in ensuring that there is proper transparency in the arrangements and that people are fully aware of the market view of some of the issues associated with the impact of the Bill. His response shows, again, that the Government have been prepared to listen on this, and I welcome those remarks and the amendments in this group.
Mr. Redwood: Lords amendment 1 invites us to modify special resolution objective 1, as set out in clause 4. The Bill invites us to approve five objectives. That seems rather a lot to me. When I examine the objectives carefully, I see that objectives 1 and 2 are similar. Objective 1 is
“to protect and enhance the stability of the financial systems of the United Kingdom.”
“to protect and enhance public confidence in the stability of the banking systems of the United Kingdom.”
That is a sort of spin-age version of objective 1. I put it to Ministers that the spin would take care of itself if there were stable, confident and inspiring financial systems—that would indeed inspire public confidence. No spin strategy will inspire confidence if the systems are rotten. Perhaps objectives 1 and 2 amount to the same thing and could be merged, and could then take the added strain of Lords amendment 1. It states that
“the reference to the stability of the financial systems of the United Kingdom includes...a reference to the continuity of banking services.”
As my hon. Friend said that that proposal emerged from an idea of his, I shall be careful in what I say about it, but I seek clarification on the Government’s phrasing. I am happy if the provision refers to the need to carry on lending to people and companies, particularly those in the United Kingdom. I do not wish too much of that business to be interrupted by whatever changes need to take place in the banking system because of the imaginary crisis that we are hypothesising. I am obviously happy if this is just another way of saying that we want deposit protection; indeed, one of the objectives is, rightly, to protect depositors—that would be the main purpose for which one would undertake these interventions. However, the provision may refer to the continuity of the banking services as supplied by the failing bank, and that is not what we should be providing for at all. Perhaps the provision needs tweaking to make that clear, as I am sure that my hon. Friend did not want to see that type of continuity.
If a bank starts to get into trouble, we need a change, and perhaps a dramatic change. One of my worries about this process, as teased out by the amendments, is that that might not be achieved in the most obvious or cheapest way. The three stabilisation options are: transfer to a private sector purchaser, transfer to a bridge bank or transfer to temporary public ownership. There should be a fourth option, which should be tried first, in which the central bank would act as the banker to the failing bank and make short-term loans, with many strings
attached, including management change, cost reductions and adoption of a different business model—all the things that would normally be tried before deciding that a bank was finished. The problem is clearly bad management, and the first thing to do, before lending the bank more money, is to demand a strengthening of, or a change in, the management.
My worry is that the system laid out in amendments 1 to 6, buttressing and changing the special resolution regime, will be soft on bankers and soft on bankers’ bonuses. We should not be soft on those things when top bankers run banks badly and then seek some form of public assistance or intervention. We need a system that will allow us to remodel failing banks and take tough action to tackle failing management—obviously by agreement with the shareholders, as they are private sector banks. That would be a better approach than moving immediately to one of the three stabilisation options.
Ian Pearson: The special resolution regime will apply when a bank is clearly failing. The right hon. Gentleman should rest assured that many steps would be taken before determining that a bank was failing and the threshold conditions had been met. The issues that he is talking about do not need to be part of the Bill, because it is about stabilisation of a failing bank. The actions that he is referring to will have been taken—or at least considered and evaluated—before that point is reached.
Mr. Redwood: That is a helpful intervention and I am reassured a great deal by it. The model of the intelligent central bank and the generation of management change can often represent a better and cheaper way forward and should be tried before these rather more draconian steps under the SRR.
I would also appreciate some reassurance that “continuity of banking services” does not mean continuity of management, management practice, management bonuses and bad practice in failing banks. Those factors need to be changed as quickly as possible to limit the damage. If continuity means that the brand and the management must carry on, that could perpetuate a situation like the one that we have at the moment in which never has so much been spent by so few to so little effect. Huge sums of money are tipped into the big bad banks, and if change is not generated quickly enough at the top, the taxpayer is lumbered as a lot of money goes into the banks to no immediately apparent good effect. It is estimated that £1 trillion will be spent on fixing the banks, but we could fix an awful lot in Britain if we spent that sum on something other than banks. That is why resentment is building up.
We need to ensure that we try the easy steps first before we move on to the wider regimes. It would be sensible if the objectives were slimmed down a bit. They should obviously include protecting public funds and depositors. They also include the general aim of financial stability. The continuity requirement should mean preserving a worthwhile business, not necessarily preserving a management style or brand. In the case of Northern Rock, the Government had good intentions when they nationalised it, although I thought that there were many cheaper and easier ways to save it. The first reaction on nationalisation was to put it in run-off, so far from preserving its contribution to the system, it ran
down its mortgage book and sacked its staff—not perhaps what the Minister’s colleagues expected from nationalisation. If we accept the amendments, it would be easier in the future to try to create continuity, and that would be welcome, because it is ridiculous to nationalise something and then run it down and sack the staff. The business should continue trading in one form or another, although it needs quick management change, a change of culture, a different approach to risk and, perhaps, to marketing and branding. However, it is a waste of money just to close it all down.
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Ian Pearson: I welcome the comments from the hon. Gentleman, who supported the amendments. The right hon. Gentleman posed several questions, most of which were explored intensively in Committee in both Houses, as I am sure he would appreciate. He raised the issue of continuity, which is one of the key considerations in dealing with a failing bank. We are talking about continuity in terms of providing a continuous service for customers. For individuals, that will mean ensuring that they can have their monthly salary paid and write cheques as usual. Continuity of banking services for businesses is also important. We need the SRR objectives and the amendments will add value to the Bill.
Lords amendments 2 to 6 agreed to.
Termination rights, &c.
Ian Pearson: I beg to move, That this House agrees with Lords amendment 7.
Mr. Deputy Speaker: With this it will be convenient to discuss the following: Lords amendments 8 to 16.
Ian Pearson: This group of amendments covers two broad but interrelated issues: default events and partial transfer safeguards. The majority of the amendments made in the other place have been in response to the concerns of stakeholders and reflect the approach that we have adopted—to listen and to try to build consensus.
As hon. Members will know, we have tried throughout this Bill to balance the need for the authorities to have the right powers to effect a successful resolution with the right protections to protect legal certainty and market confidence. The Government have sought to consult stakeholders and provide the protections that precisely target their main concerns. Admittedly, that approach has taken numerous consultations and several amendments to the Bill, but I do not apologise for that. The Bill is certainly much improved as a result. With that approach, which includes the safeguards in secondary legislation, we have got the balance right. I wish to place on record my thanks to stakeholders and members of the Opposition for working with us to achieve that overall result.
I do not propose to cover the detail of the amendments at any great length. As I have said, they are the result of numerous rounds of consultation and co-operation between all concerned. Baroness Noakes provided my noble
Friend the Financial Services Secretary and Minister for the City with an opportunity to read into the record, at some length, the technical detail of and effect achieved by each amendment.
I propose instead briefly to summarise the amendments. They achieve two things. First, they amend various technical definitions in the Bill to provide complete certainty on important legal concepts including termination rights, trust interests, and set-off and netting. Secondly, they provide a balance between, on the one hand, the legitimate interests of bank and third-party counterparties in being able to contract with certainty for termination rights where set-off and netting arrangements are involved in financial contracts and, on the other hand, the ability of the authorities to transfer banking business to a new company—either a private sector purchaser or a bridge bank—with certainty over what contracts have been transferred.
The balance is achieved via the mechanism of the conditional transfer provided for in an amendment to clause 34, which will be backed up by the necessary safeguards to be made under clause 47. I can, of course, provide more detail on these matters should any hon. Member wish me to do so. However, as I have said, they have been extensively explored in the other place and put on the record there.
Mr. Redwood: I can see that these are important technical matters, and I would appreciate a reassurance on them from the Minister. Rapid resolution of these issues if a company goes under or gets into difficulties is terribly important for lots of better run businesses that are relying on the counterparty arrangements. Have the Government made any progress in ensuring that that resolution can be done quite speedily?
Ian Pearson: I certainly agree that speed is important, particularly when it is needed to exercise the special resolution regime and to decide which of the stabilisation options to pursue. People will often be acting in a highly pressurised situation where decisions need to be made quickly. We think that the Bill and its provisions are fit for purpose, and they work as far as stakeholders are concerned. I think that it is fair to say that most discussion has been on partial transfers and safeguards and the impact on counterparties. That is why we have taken a substantial amount of time to try to get this right by working with stakeholders. That is why I expressed my thanks to those who have worked with us. We believe that we have a compromise that has broad support.
As I said, the Government have always acknowledged the invasiveness of the powers to switch off termination rights and make partial transfers. With these amendments, I believe that agreement has been reached that the necessary safeguards have been put in place, imposing suitable restrictions on the powers of the authorities. We have worked closely with stakeholders through the expert liaison group and through scrutiny in this House and the other place. We have also worked with further external stakeholders who have made a number of valuable points during all stages of the Bill. The Bill now provides the right balance between targeted protections for the market and appropriate powers for the authorities to effect successful resolutions of failing banks.
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