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Mr. David Gauke (South-West Hertfordshire) (Con): First, may I express my agreement with the Minister about the importance and sensitivity of this subject and acknowledge that the Government have sought to consult stakeholders widely? They have certainly involved us in the discussions. I pay tribute in particular to my noble Friend Baroness Noakes, who was heavily involved in discussions with the Treasury, the expert liaison group and various stakeholders. I acknowledge that the Government have granted us and my noble Friend that opportunity. It has been clear throughout that the Minister in this place has been aware of the difficulties with these subjects. He has been keen to listen to representations from outside groups as well as from Members of this place and the other place.
It is perhaps worth reiterating briefly the particular issue that applies with partial property transfers, to which my right hon. Friend the Member for Wokingham (Mr. Redwood) alluded in some respects. When a bank is in difficulty and finds itself entering the special resolution regime, it might find that some properties and contracts are transferred to a bridge bank, for example, whereas others remain in the residual bank. The counterparty contracting with that bank might face considerable difficulty. Normally, that counterparty would be able to net or set off the various contracts with one party, but it would now find that it was contracting with two parties and that netting and setting off might not be available. That substantially increases the risks involved for that counterparty. In this field, that has considerable consequences on things such as regulatory capital. A regime that does not adequately address the issue will have an impact on the competitiveness of the UK banking sector at a time when that would be most disadvantageous.
It is right that this matter has been closely scrutinised throughout the progress of the Bill. It is right that the other place considered the subject very closely and made a number of amendments, which are before us. Before I raise one or two questions about the amendments, I want to make one point about the scrutiny.
The Government have done their best and have tried to consult widely, but the nature of the legislation and the desire to push forward with the Bill within a restricted time frame could mean that additional issues come up. As it happens, I was contacted yesterday by an expert in private international law who raised concerns about the definition of foreign property in clause 39. It would be inappropriate to raise those points at this stage, but I mention that merely to highlight that there might still be issues that need to be addressed. Of course, a great deal of the legislation is dependent on the secondary legislation, which might in some cases have been published but is yet to receive approval. I hope that the cross-party consensus and co-operation on the primary legislation will continue when we come to the secondary legislation.
Let me turn to the specific issues. Amendments 7 to 10 and 21 to 24 relate to clauses 22 and 38, which are to do with the circumstances in which it might be necessary to disregard either a share transfer or a property transfer as an event of default. We accept that without these provisions it might be impossible for a bank to continue to operate when a counterpartywe are not necessarily talking about financial counterparties and could be talking about service providers, for examplemight have the opportunity to walk away from their contract because an event of default would have been triggered by the share transfer or the property transfer.
Yesterday, Lord Myners referred in the other place to wide counterparty flight, and that is the issue here. The provisions have been expanded to address the question of conditions precedent and the concern about that that has arisen during the Bills progress through the Parliament. Given that we are dealing with new wording that has not been debated in this House before, will the Minister say something about the thinking behind amendments 10 and 24, in particular? What are the circumstances that he is concerned about, and how was the problem drawn to his attention?
I turn now to amendment 18 to clause 34, which states that a transfer may be conditional on a certain event or situation occurring. Will the Minister give the House a little more information about what sort of events or situations he thinks may trigger a transfer? I can see that the proposal has the advantage of flexibility: the case made for the clause as a whole is that it provides greater certainty to the transferee and protects those who have contracted with the original bank, and those are both worthy objectives.
The early indication from consultation with stakeholders is that this approach will be supported.[ Official Report, House of Lords, 9 February 2009; Vol. 707, c. 966.]
I believe that that is right, and my noble Friend Baroness Noakes endorsed the observation, but some people might be a little concerned about the use of the phrase early indication. How widely have the Government consulted on the approach set out in amendment 18? Are they satisfied that it enjoys widespread support?
Finally, various essentially technical amendments are proposed to clause 48, which provides the power to protect certain interests. That is where the safeguards lie, and where the protections for counterparties exist. At many stages in the Bills passage through Parliament, we have debated why more safeguards cannot be included on the face of the Bill. Why not go further and exclude financial contracts altogether? My understanding is that the financial collateral directive excludes the majority of financial contracts from this area, but not all of them. I should be grateful if the Minister would update the House about the Governments thinking on this matter, and provide a little more information about the progress that will be made on the relevant statutory instruments.
The real substance of the legislation in this area will be set out in the statutory instruments, and it is not necessary to go once more through the whole debate about the balance between statutory instruments and primary legislation. No doubt the Minister will argue that there is a need for greater flexibility, but it would help the House if we had a little more information about what progress will be made.
These are very technical matters, but they are hugely important. The Minister has acknowledged that throughout, and we welcome the real progress that has been made in the House of Lords. However, I hope that the Government will continue to review this area and communicate with the banking liaison panel even after the secondary legislation has been passed. If any difficulties arise, such as market uncertainty or a loss of confidence, I hope that the Government will be prepared to return to the issue as a matter of urgency.
Ian Pearson: As the hon. Member for South-West Hertfordshire (Mr. Gauke) rightly notes, these are technical issues, but in many instances they are absolutely crucial for ensuring legal certainty. It is important that the detail is got right, and that is one reason why we have had the extensive consultation that I mentioned earlier. I can certainly assure the hon. Gentleman that the banking liaison panel will monitor the legislation, and we also want to use it in the wider role that I have announced previously. If problems arise, we want to be able to take the widest possible advice about potential solutions.
I shall respond briefly to some of the technical points that the hon. Gentleman raised. I am sure that the banking liaison panel will continue to look at any further technical issues that may arise, but the hon. Gentleman asked about conditions precedent. That provision is already in commercial use and could easily be substituted for a termination right. Since the Bill was introduced, the authorities have been concerned that the definitions used in it did not cover the conditions precedent device with absolute certainty.
For example, a contract may provide for B to perform an obligation in favour of A, but only when one of a number of specified events has or has not occurred. Typically, those events would be similar to events that would entitle a party to terminate a contractual arrangementsuch as non-performance by A of his obligations to B, or matters relating to As creditworthiness. As a result, the Government consider it essential to leave no doubt that devices such as conditions precedent are caught by the Bill, and have introduced amendments to achieve that. Otherwise, counterparties could seek to opt out of the special resolution regime, and private sector purchasers might be reluctant to accept transfers of banking business, for fear that they would be ineffective.
The hon. Gentleman asked how the conditional transfer under amendment 18 would work. Its aim is to prevent counterparties from closing out against the transferee simply as a result of the transfer, while at the same time preserving their termination rights against the residual bank. I emphasise that that does not prevent the counterparty closing out should the transferee breach the obligations that have been assumed.
An unfettered right to close out against the transferee or new company carries potential risks for the resolution. The new company could immediately be required to pay crystallised liabilities, and that could create liquidity stress. Moreover, a counterparty that closed out on such a basis would have acquired a better right than it had in the first place, namely the right to close out not against a failing institution but against the more creditworthy bridge bank or private sector purchaser. That is not the same as the termination right for which the counterparty had contracted, and the Government believe that the amendment to clause 34 offers a way of overcoming that concern.
Government amendments 14, 18 and 28, among others, concern default events. Amendments 14 and 28 respond to concerns raised by interested stakeholders about the drafting of clauses 22 and 38, and I shall give the House an example of how we have worked. My noble Friend the Financial Services Secretary arranged a meeting between Treasury officials, parliamentary counsel, and the City of London Law Society to resolve these problems. The amendments are the result of the concerns that have been addressed.
We have always been clear that the purpose of the clauses is not to prevent termination rights from being exercised when the transferee defaults on the obligations that they assumed. If a party assumes a contract under transfer, and then breaches an obligation under that contract in a way that is unrelated to the transfer, the counterparty should be able to exercise any right to terminate the contract that may arise in consequence. Interested parties thought, for technical reasons, that the drafting did not achieve that outcome, and although we did not agree, we were happy to respond to those concerns by bringing forward amendments that are intended to dispel any doubts that might exist. That is another example of the consensual approach that we have adopted.
Finally, I turn to Lords amendment 18, to which the hon. Gentleman referred. It relates to clause 34. The amendment is part of a Government package to respond to the concern that the powers relating to default events would lead to market uncertainty for financial contracts, particularly those with set-off and netting arrangements. I should make it absolutely clear that under the financial collateral arrangements directive, the Government must allow financial collateral agreements to take effect in accordance with their terms, including by respecting terms that commit the counterparty to closing out. As the hon. Gentleman is aware, we are talking about a minority of financial contracts that are not protected under the directive. I do not have the technical expertise to go into the detail of what those contracts are, but I gather that those who understand these matters know what we are talking about.
The hon. Gentleman asked how widely we had consulted on some of the issues. The best response that I can give is to say that we have consulted influential legal advisers on our approach. The indication is that they will advise clients that clean legal opinions can be provided. We will publish draft orders on Royal Assent, which hopefully will be received this week, and will make the statutory instruments on commencement next week. It is right that we continue to make progress on those issues. A significant number of technical issues have been addressed in the amendments, but we will of course want to continue to keep them under review. The banking liaison panel is a useful forum that will enable us to do that.
The Government brought forward Lords amendments 17 and 31 in direct response to amendments proposed in Committee in the other place by Baroness Noakes. Her amendments proposed that when a share or property transfer instrument is made by the Bank of England, the Treasury should lay it before Parliament. The Government reflected carefully on that, and the
additions to clauses 24 and 41 are the result of that reflection. Under the amendments, if the Bank of England makes a share or property transfer instrument, the Treasury would be required to lay a copy of it before Parliament, thereby allowing Parliament direct access to the instrument. The amendments respond directly to concerns raised by the Opposition, and they reflect our constructive response to the recommendation of the Delegated Powers and Regulatory Reform Committee that the House should reflect on the degree to which the instruments are subject to parliamentary accountability.
Hon. Members, especially those who were members of the Public Bill Committee, may recall that misgivings were expressed in this House about the term subserviate, and those misgivings were shared by Members in another place. The Government therefore brought forward an amendment to replace the term subserviate with a new subsection to clause 58. I have no problem with the word. Technically, one could say that the Prime Minister subserviated me to the Chancellor of the Exchequer and the Secretary of State for Business, Enterprise and Regulatory Reform. It is clear what we mean by the term.
However, for the avoidance of doubt, and to reflect concerns raised in the Commons and the other place during the Bills passage, Lords amendment 48 states in plain language our intention, which is that the management should have a duty to manage a bridge bank, or bank in temporary public ownership, in a manner that maximises the proceeds available in a bank resolution fund only so far as the duty is compatible with the special resolution objectives and the code of practice. I hope that the amendments satisfy both Houses concerns on that point; again, the amendments demonstrate our willingness to respond helpfully on such matters, even though in this case we are talking about a linguistic change, rather than a detailed policy change.
Government amendment 58 requires the Treasury every year to lay before Parliament a report on the activities of any bank in temporary public ownership. That is a direct response to concerns, expressed here and in anther place, that there were insufficient reporting requirements placed on banks taken into temporary public ownership. There are numerous ways in which the Government are accountable to Parliament for their role with regard to banks in temporary public ownership. Parliament can already request Treasury Ministers to report on the activities of a bank in temporary public ownership whenever it wishes, including, should it so desire, more frequently than once a year. Furthermore, all the usual accounting and reporting requirements under the Companies Act 2006 will apply to banks in temporary public ownership. However, having reflected on the matter, the Government are persuaded that it would be helpful to include an express requirement to produce a report on the activities of a bank in temporary public ownership. That is why I commend Lords amendment 58, and the other amendments in the group, to the House.
I shall deal first with Lords amendment 58, which requires the Treasury to publish annually a report on banks that have been nationalised under clause 13(2).
As the Minister said, the amendment was tabled in response to concerns expressed in the other place. My noble Friend Baroness Noakes tabled a much more extensive amendment, which specified the information to be published. It referred not just to those banks that are nationalised or taken into temporary public ownership under this Bill, but to those that were nationalised under the Banking (Special Provisions) Act 2008. That Act expires later this month, and the Bill will replace it.
My noble Friends amendment was much more specific than the Government amendment, in that it required the Government to publish a report covering the financial position of a nationalised bank and its plans and prospects, and any guarantees in respect of a bank that might need to call on Government funds. It also had a catch-all provision that required the Government to publish anything else that they thought was relevant. Where amendment 58 falls down is that it does not give much information on the type of report that we should expect the Treasury to lay before Parliament.
Will the Minister be more explicit about what we will see in the annual report? I assume that it will be more than just the report and accounts that all companies are required to publish under the Companies Act 2006. Will it include a statement on the banks business plan, and how it measures up against that plan? Will the Government commit to publishing the objectives that they set management, and what progress is made on them? Will the report deal with the impact that a nationalised bank has on competition in the financial sector? We touched on that point in Committee. A bank in temporary public ownership may be seen to have an advantage over banks that are free of Government control. The Government responded to the concerns that were expressed at the time about the way that Northern Rock could take advantage of the savings market. If comparable situations arise in the future, will the Government, under this requirement, produce a report setting out the impact that a nationalised bank has had on the market?
The Minister said that reports can be produced on a more regular basis. That is indeed important. In that respect, Northern Rock is probably a better example because not only does it publish its annual report, but it produces a half-yearly statement, as well as quarterly trading updates. It therefore exceeds the minimum set out in amendment 58 and offers a template for the level of transparency that would be expected from a bank in state control.
A similar level of transparency has not applied to Bradford & Bingley, however. We have heard nothing about its financial condition since it was nationalised at the end of September. There has been no quarterly statement or update about its trading, and nothing about the level of arrears on its mortgage portfolio. That was touched on in the earlier debate about the buy-to-let properties that form part of its portfolio. We see a distinct contrast between the transparency applied in the approach to Northern Rock, and the different standard applied to Bradford & Bingley.
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