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Interestingly, the letter went on to talk about the lack of a proper contractual framework for some of the transactions, something that was highlighted once the implementation of the markets in financial instruments directive had taken place. Clearly, therefore, various issues emerged from the administration process for Lehman Brothers in the UK with which we need deal. That is why, when the Government announced in the pre-Budget report that the Bill would be amended to
introduce new rules to deal with the administration of investment banks, they received support from Conservative Members. However, there was also a recognition that the framing of the rules was not straightforward and, in his remarks, the Minister made very clear the complexity of the issues involved.
I want to touch on two issues. The first has to do with the principles underpinning the regulations, and the second with the parliamentary process. One of the challenges arising out of these matters is definitional, especially as the term investment banking is not found in the Financial Services and Markets Act 2000. So Lords amendment 84 lists the sort of activities that such a business might undertake and uses that as the basis of the new clause.
Is the Minister happy that the definition is broad enough as it stands to capture investment banks that are incorporated in the UK? Does he envisage any further changes? The Bill limits the powers to UK-incorporated institutions, and Lehman Brothers International (Europe) was obviously a UK-incorporated business, but there are branches of European economic area banks that operate in the UK and undertake investment banking activity that would fall outside the Bills terms.
Has the Minister had discussions with his EU counterparts on this matter? If the law in Germany or France on the administration of investment banks was not especially satisfactory or clear, the collapse of a German or French investment bank would have an impact on Londons international activities.
Clearly, some learning from the experiences of Lehmans clients has gone on. Subsection (3) of the new clause that is amendment 85 sets out the have regard to factors. It is important to set out the framework in which the regulations will be put together, to ensure that they work in the interests of the UK financial services sector, and to make sure that there is certainty for banks, for creditors and clients, and for liquidators and administrators.
The issues that the Government will have to tackle when they draw the regulations together will in a way mirror some of the matters that have been debated in the context of set-off and netting. Those matters have been discussed throughout the Bills passage, and it is worth reiterating the importance of achieving a proper resolution of the issues to do with set-off and netting.
In my conversations with regulators and practitioners, it has been made clear that getting this wrong would mean that transactions would be accounted for on a gross rather than a net basis. That would flow into capital requirements and make London less attractive for international businesses, but Lords amendment 86 illustrates some of the challenges that the Government will face. It also makes it clear why there needs to be some proper parliamentary scrutiny of the secondary legislation.
assets are to be...treated as client assets.
The use of the phrase are to be treated as client assets is key, as that is very different from saying that the assets are client assets. The process will be that someone will have to assume that the assets are client assets, but they may belong to somebody else.
for the creation or enforcement of rights...in respect of client assets.
We are talking about the creation of new rights in respect of those assets, and potentially re-writing contracts, so the provisions in the regulations are significant. It will be difficult to introduce them in secondary legislation.
That brings me on to my second point, which is about how the regulations are made and reviewed. Significant concern was expressed in the other place about the fact that the powers are to be introduced through secondary, rather than primary, legislation. The bank insolvency procedure and bank administration procedure arrangements in parts 2 and 3 of the Bill are being put in place through primary legislation, and the Insolvency Act 1986 was clearly primary legislation, so there was concern about the extent of the regulations that will have to be made through the regulation-making powers in the Bill. Obviously, we welcome the fact that the regulations will be scrutinised under the affirmative procedure, and the fact that there will be statutory consultation before they are laid before Parliament. It is important that the consultation works and is thorough, because as every Member in the House is aware, there is no power to amend individual items in regulations, under either the affirmative or the negative procedure.
The Minister talked about the review that will take place two years after regulations are made. Perhaps my memory is faulty, but I am not sure whether he touched on the sunset clause in subsection (4), which is inserted by Lords amendment 87. The subsection says:
If the power to make investment bank insolvency regulations has not been exercised
within two years of Royal Assent, the powers lapse. That gives rise to the question: is it the Governments intention to make regulations under those powers? The Minister indicated that work looking into the matter was under way, but is it the Governments intention at the moment to bring forward powers under that process, or can we assume that the powers will lapse after two years?
Furthermore, as the Minister said, a review clause was inserted into Lords amendment 88, which requires a review of the regulations to be completed within two years of the regulations coming into force. There is a double lock there: if the regulation powers are not used, the power to make them lapses, and if the powers are used, there is a review after two years. There was a debate in the other place about whether a sunset clause should apply to the regulations, so that they, too, lapse after two years. There would then be consistency between the two sets of sunset clauses.
I understand that it was argued in the Lords that it would be better for primary legislation to be made, and for the normal processes to be used to replace the secondary legislation. I had some sympathy with the view that there should be proper parliamentary process, particularly given that the powers in the regulations are so extensive and can impact on contractual rights. There is a strong argument for enhanced parliamentary scrutiny, and perhaps for applying a sunset clause to any regulations made, as well as to the power to make them. However, on the other hand, there was a strong argument about
the need for certainty. One of the themes that has characterised the Oppositions contributions to the Bill, both here and in the other place, is the idea that there should be certainty for industry.
The London Investment Banking Association has expressed the concern that if a sunset clause applied to the secondary legislation, it would create uncertainty. However, it supports the sunset clause that applies if no powers are made. Clearly, its position is quite subtle and nuanced. The associations concern is that if the regulations were subject to a sunset clause, there would be a perception that our insolvency procedures were in a period of flux. When people pledged or committed assets, they would not know whether there might be a change to the rules the next day if the rules had expired.
I accept the position that we have reached, whereby if the regulation-making powers are not used, they will lapse. If they are used, there will be a review after two years. In reaching that conclusion, I suspect that the Government have erred in favour of certainty rather than parliamentary scrutiny. The test that they will face in introducing secondary legislation is to ensure that there is proper consultation with interested parties. Secondary legislation needs to be robust and command broad support. Inadequate consultation and a failure to listen will lead to poor secondary legislation, which will act as a disincentive to investment banks being based in the UK.
Ian Pearson: The hon. Gentleman made some typically reasonable points and managed in the end to argue in favour of the Governments position as set out in the amendments, particularly why we resisted a sunset clause of the type that was considered in the other place, and why we reached the decisions that we did.
With the leave of the House, I shall make three brief points in response. First, history will judge very harshly the collapse of Lehman Brothers and the failure of the United States to intervene. It is obviously difficult to consider counterfactual scenarios and what might have happened had Lehman Brothers not been allowed to collapse, but it seems clear that that collapse precipitated a catastrophic crisis in confidence in the banking system and created a huge number of problems that have reverberated around the world and still affect the UK. The Lehman Brothers insolvency in the UK, as the hon. Gentleman rightly pointed out, is extremely complex and will take considerable time to resolve. We all wish that we were not in that position.
My second point is in response to the hon. Gentlemans comments about applying the Bill to non-deposit takers. As he knows, the special resolution regime has been designed for deposit takers. It is an SRR objective to protect depositors and now to ensure the continuity of the banking service. The amendments deal only with clarifying the insolvency procedures for UK investment banks. Branches will be subject to home state insolvency.
The hon. Gentleman asked whether we were discussing that with our European partners. We are in discussion with the European Commission, as is the Financial Services Authority, on issues relating to branches and to their regulation. I believe that the actions that have
taken place over recent months have demonstrated that significant improvements are needed to the regime of home state regulation if it is to be effective in the future and if it is to give depositors confidence that a branch operating in the UK and regulated in a home state inside or outside the EU or the EEA can be regulated robustly in the home state.
My third and final point is about subsection (4) of the new clause inserted by Lords amendment 87. The hon. Gentleman is right to say that the Government will make regulations, if necessary, as a result of the expert review that is taking place. The sunset clause exists to provide certainty to the market that the regulation-making power will lapse if not used. The wider proposals for sunset regulations would not work because they would, as has been clearly demonstrated, lead to far greater uncertainty. The proposed review has been welcomed by the markets and those who consider these matters. Again, we think that it strikes the right balance because changes to the insolvency regime are likely to be needed with respect to investment banks. However, we are not yet in a position to be definitive in legislation.
Mr. Hoban: I am grateful to the Minister for those remarks. It is important to get the issue right and for there to be the right degree of certainty. One of the comments made by the IMA was about the poor state of the contracts in respect of some of the transactions. Is further work by investment banks and their clients, to improve the clarity of the contractual terms that govern the transactions between them, an alternative to secondary legislation?
Ian Pearson: Different organisations, including the one to which the hon. Gentleman refers, have made a number of suggestions. We need to proceed carefully on this issue, which is extremely complicated. We have to ensure that we take the views of experts and carefully consider what policy interventions might be necessary. Only if it is explicitly recommended by an impartial group of experts should we proceed. Firms can expect that any changes to be made will be permanent. Again, that is vital for promoting certainty.
We are well aware of the fact that we need to act decisively and without undue delay. I confirm to the House that there will be no vacillation as to the new insolvency procedures and that we will lay regulations, if appropriate, as soon as we have received firm advice from the expert panel. I am sure that what I have said will give the reassurances that the House seeks. I believe strongly that it will give confidence to those watching our proceedings who need to have legal certainty for their transactions.
Ian Pearson: We now move to the final group of amendments. Amendment 89 would amend the Banking (Special Provisions) Act 2008, and clarify it with respect to information-gathering powers given to the independent valuer. It introduces a new clause that declares that the power, under section 9 of the 2008 Act, to make provision for the appointment of a valuer includes the power to replicate or make provision of a kind that may be made under the provisions dealing with similar matters in the Banking Bill clause 55(1) to (3). That will enable the Treasury to make an order to ensure that the independent valuer has all the powers he or she needs to carry out their functions, thus ensuring that an appropriate level of compensation, if any, can be determined in a timely fashion.
The Northern Rock valuer has recently written to the Treasury requesting powers to allow him to obtain information from third parties where such information is necessary for him to be able to determine the amount of any compensation due to former shareholders. It is appropriate that the valuer has these powers in order to avoid delay in the future should a tribunal question his valuation decision for lack of evidence. Therefore, in the interests of determining the amount of any compensation due to former shareholders swiftly and definitively, we are making this amendment to the Bill to put beyond doubt the legal basis for the provision of such information-gathering powers by way of Treasury order. Any additional information-gathering powers provided to the valuers would be by Treasury order laid before both Houses of Parliament and subject to the draft affirmative procedure; and the powers, once granted to the valuer, would be governed by a court or tribunal.
Moving on to amendment 90, the Government believe, as I have said in debate on several occasions, that full and effective co-operation between the tripartite authorities is both desirable and necessary. That is especially important in the case of safeguarding the UKs financial stability, where, as I have said, each member of the tripartite authorities has a distinct role to play. When addressing the Bank of Englands new financial stability objective in Committee, my hon. Friend the Exchequer Secretary referred to the phrase to contribute to and said:
That phrase reflects the fact that the Bank does not have a duty to ensure financial stability on its own, because that would be impossible. That responsibility is shared nationally with the FSA and HM Treasury and internationally with the European Union and other international bodies, which all have a major role to play, alongside market participants themselves. [ Official Report, Banking Public Bill Committee, 30 October 2008; c. 240.]
It is clear that the phrase contribute to implies that the UKs financial stability is not the sole responsibility of the Bank of England. However, on reflection, and having considered the concerns raised by noble Lords in the other place, we have decided to make explicit reference in the Bill to the fact that the Banks financial stability objective will be pursued in collaboration with other relevant bodies, including the other tripartite authorities. Therefore, amendment 90 inserts wording to the effect that the Bank should aim to work with the Treasury, the FSA and other relevant bodies to protect the UKs financial stability.
Amendments 91 to 92 broaden the circumstances in which a member of the FSA must disclose interests. With these amendments, the member must now disclose any interest in a business or dealing that falls to be considered by the committee, whether the interest is direct or indirect, current or a likely future interest. This, I believe, is the appropriate scope for the provision. As I have said previously, I am grateful to the noble Baroness, Lady Noakes, for tabling amendments in another place that highlighted where these provisions could be improved.
Amendment 93 is consequential and removes what was subsection (3) of the new clause in the Bank of England Act 1998, which overlapped to a great extent with the new provisions for disclosure of interests. I commend the amendments to this House.
Mr. Hoban: I think that my hon. Friends would be reluctant for me to do that, since I could speak for another 32 minutes on this group of amendments. [ Interruption. ] I might be tempted to do so, but not on this occasion, to my colleagues relief as much as mine, I suspect.
The Minister said that the purpose of amendment 89 is to assist the valuer of Northern Rock in completing his work, and that it amends the Banking (Special Provisions) Act 2008. Can he confirm that there are adequate powers in the Bill to assist valuers when a company has been taken into temporary public ownership so that we do not have to return to this at a later stage?
On amendment 90, we discussed in Committee the fact that it seemed rather odd for the Bank of England to be the only body that had statutory responsibility for financial stability. It is not a statutory responsibility of the Treasury or of the FSA, so this is a welcome move forward as it ensures that the Bank and the Treasury recognise their roles. We had tabled an amendment along similar lines in the House of Lords, but apparently the Government did not like our use of the phrase, in co-operation with and preferred the much more dynamic, working with. I am not sure that I can see much difference, but the Government have their own view of what is and is not appropriate language to include in the Bill. I am rather grateful that they did not try to use the word subserviate in the amendment.
On amendments 91 to 93, I echo the comments that the Economic Secretary made about my noble Friend Baroness Noakes, who has made a significant contribution to improving the Bill during the deliberations in the Lords. It is right to ensure that there is broader disclosure of any conflicts of interest of members of the financial stability committee, some of whom are non-executive directors who hopefully will have relevant experience from their business lives to contribute to the committee. I welcome all of the amendments.
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