The
Committee consisted of the following
Members:
Chairman:
Mr.
Joe
Benton
Ancram,
Mr. Michael (Devizes)
(Con)
†
Bailey,
Mr. Adrian (West Bromwich, West)
(Lab/Co-op)
†
Blears,
Hazel (Salford)
(Lab)
Browne,
Mr. Jeremy (Taunton)
(LD)
Cable,
Dr. Vincent (Twickenham)
(LD)
†
Duddridge,
James (Rochford and Southend, East)
(Con)
†
Hands,
Mr. Greg (Hammersmith and Fulham)
(Con)
Hewitt,
Ms Patricia (Leicester, West)
(Lab)
Lilley,
Mr. Peter (Hitchin and Harpenden)
(Con)
†
Linton,
Martin (Battersea)
(Lab)
†
McCarthy-Fry,
Sarah (Exchequer Secretary to the
Treasury)
†
McGovern,
Mr. Jim (Dundee, West)
(Lab)
†
Mudie,
Mr. George (Leeds, East)
(Lab)
†
Salter,
Martin (Reading, West)
(Lab)
†
Seabeck,
Alison (Plymouth, Devonport)
(Lab)
Yeo,
Mr. Tim (South Suffolk)
(Con)
Ben Williams, Committee
Clerk
† attended the
Committee
Sixth
Delegated Legislation
Committee
Tuesday 23
March
2010
[Mr.
Joe Benton
in the
Chair]
Draft
Building Societies (Insolvency and Special Administration) (Amendment)
Order
2010
4.30
pm
The
Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):
I beg to
move,
That
the Committee has considered the Draft Building Societies (Insolvency
and Special Administration) (Amendment) Order
2010.
The
Chair:
With this it will be convenient to consider the
draft Building Societies (Financial Assistance) Order
2010.
Sarah
McCarthy-Fry:
Thank you, Mr.
Benton.
The
building society sector weathered the financial crisis relatively well
in the light of the especially harsh business environment of the past
few years. During that time, however, there has been consolidation in
the sector and one failure—that of the Dunfermline building
society. The sector continues to provide valued services to members and
customers throughout the United Kingdom and the Government are
committed to supporting the financial mutuals sector as a viable
alternative to banks and an important way of ensuring a more
competitive financial services
sector.
The
draft Building Societies (Financial Assistance) Order 2010 will modify
the legislation that applies to building societies to make it easier
for them to receive financial assistance from a qualifying institution:
the Treasury, the Bank of England, the European Central Bank or another
central bank in the European economic area. Although the building
society sector has held up well, the financial crisis brought about the
need for liquidity assistance for financial institutions of all kinds.
Liquidity support, such as that provided by the Bank of
England’s special liquidity scheme, is one example of the sort
of scheme in place across Europe and elsewhere. Improving the ability
of building societies to access emergency funding from central banks
strengthens the resilience of institutions against potential failure
and thereby protects the interests of building society customers, who
are also their
owners.
In
most respects, the order replicates the provisions of the Building
Societies (Financial Assistance) Order 2008, which was made
under the Banking (Special Provisions) Act 2008. It modifies the
application of section 7 of the Building Societies Act 1986 to ensure
that relevant financial assistance from a qualifying institution is not
taken into account for the purposes of the 50 per cent. limit on
non-member funding of building societies. It also disapplies
section 9B of the 1986 Act, which restricted the
creation of floating charges, and applies insolvency law
provisions on administrative receivers to make it possible
for a qualifying institution to appoint an administrative receiver
under a floating charge.
However, the
draft order makes wider provision than the 2008 order. Whereas the 2008
order applied only to financial assistance offered or provided by the
Bank of England, the 2010 order will apply in respect of financial
assistance offered or provided by the Treasury, the Bank of England,
another central bank of a member state of the European economic area or
the European Central Bank. It therefore widens the sources from which
financial assistance can be granted. In addition, whereas the
2008 order applied only when financial assistance is
provided to maintain the stability of the financial system in the UK,
the 2010 order will apply when financial assistance is provided for any
purpose, even when there is no wider threat to financial
stability.
Prior
to laying the order, the Treasury consulted in July 2009 on a wider
order that would modify building society law to make it easier for
building societies to receive financial assistance from a central bank
and allow building societies to grant floating charges in favour of
payment and settlement systems to help them to take advantage of such
financial assistance. The consultation closed on 31 October 2009 and
respondents expressed the view that both provisions would be useful for
the purpose of accessing financial
assistance.
After
further consideration, however, I decided that it is appropriate to
make an order that is more limited in scope than that proposed in the
consultation. The wider order would have enabled building societies to
grant floating charges for reasons unconnected to financial assistance.
It would have given a general and indefinite permission to building
societies to grant floating charges, so that they could access payment
and settlement systems directly. Doing that could have increased risk
in the sector and would have gone beyond the intention of the policy.
The draft order therefore puts in place the first of those two
provisions only, which nevertheless makes it easier for financial
assistance to be granted to building societies from a wider range of
sources.
Let
me make it clear that the proposals in the draft order are purely
precautionary. They are intended to place building societies on a
similar footing to banks, not to single them out for special treatment.
We regard the draft order as sensible and prudent contingency planning
on the part of the authorities. Extending the financial assistance
order to cover assistance from the Treasury, the Bank of England, the
European Central Bank or another central bank in the European economic
area has been widely supported by stakeholders, including the building
societies themselves. We believe that the draft order represents
sensible contingency planning, improving the position of building
societies and bringing them on a similar footing to banks with regard
to financial
assistance.
The
Building Societies (Insolvency and Special Administration) (Amendment)
Order 2010 makes technical changes to the building society insolvency
procedure and the building society special administration procedure.
Those were created urgently in March 2009 to enable the resolution of
the Dunfermline building society to take place. It was not possible at
that point to undertake public consultation before making the necessary
secondary legislation. The Government therefore committed to full
public consultation after the event and to producing an amending
instrument if necessary. That consultation was conducted from July to
October 2009; the Treasury has also received advice from the Banking
Liaison
Panel, which has been published on the Treasury’s website.
Stakeholders supported the policy proposals and the BLP has made three
technical recommendations, which are set out in its published
advice.
On building
society insolvency, the BLP made two recommendations: first, that the
financial services compensation scheme should have certain additional
rights in the insolvency; and secondly, that society members should
retain the right to participate in the insolvency and to be informed
about its progress. Those are matters for the statutory insolvency
rules. The Government agree with the BLP proposals and they will be
included in the rules when they are made in due course.
On building
society special administration, the BLP proposed that provisions should
be made to ensure that the building society special administrator can
change the name of the residual society after a partial transfer. Under
the building society special administration procedure as it stands,
there are various routes by which the special administrator could
pursue that goal, and he or she would ultimately have recourse to the
courts. To put the administrator’s ability to change the name of
the residual society beyond legal doubt would require significant
revisions to building society law, and we do not believe that such
wide-ranging changes would be appropriate, so the order is limited to
making essentially minor and technical amendments, some of which
respond to points made by the Joint Committee on Statutory Instruments
when the original order was made.
I commend
both draft orders to the
Committee.
4.38
pm
Mr.
Greg Hands (Hammersmith and Fulham) (Con):
Let me start by
welcoming you to the Chair, Mr. Benton. I believe that this
is the first time that I have served under your chairmanship.
I thank the
Minister for her long and thorough speech. She described the measures
as purely precautionary, but obviously we in the Opposition believe
that they still deserve scrutiny. The orders are the successors to
orders made in 2008 and 2009, in the wake of turbulent developments in
the financial markets, and each in its previous form was examined in
Committee by my hon. Friend the Member for Fareham (Mr.
Hoban), whose expertise is being deployed elsewhere this afternoon. It
is right that the Government have sought to re-examine legislation that
was conceived in some haste. The consultation that they have engaged in
with the industry has been welcome.
As was made
clear when the measures were debated in another place last Thursday,
the Opposition support the changes before us this afternoon. I can also
report, following that debate, that the Minister’s colleague,
the Financial Services Secretary, has been as good as his work and has
fixed the teething troubles that were affecting the website—he
described it as “fiddling with the technology”—so
the responses to the consultation on the draft Building Societies
(Financial Assistance) Order 2010 can now be accessed without
difficulty.
However,
further to the issues raised in another place, and notwithstanding our
support for the measures, I have eight questions for the Minister
regarding the financial assistance order. The consultation document
that was published in July 2009 is rather coy about what
inspired the move to broaden the range of financial institutions
entitled to provide support to building societies outside the framework
of the 1986 Act. At present, only the Bank of England can bail out a
building society in that way. Under the new regulations, the Treasury
and any European economic area central bank can also do so. My first
question is: can the Minister explain whether any central bank or EU
body has made representations on that point? In other words, does that
particular part of the regulation arise from representations
made?
My
second question is: has the Treasury discussed such assistance with
central banks in the EEA area or the ECB? Thirdly, is there any
reciprocity in this area? In other words, is there some kind of an
agreement whereby the UK central bank—the Bank of
England—or, indeed, any other body, might in future have to
provide financial assistance to bodies in other EEA areas? Fourthly, it
would be helpful to learn in what circumstances the Minister envisages
such assistance being offered. Although we might be happy for the ECB,
for example, to spare us from having to bail out one or all of our
building societies, if that unfortunate situation should arise again,
it is hard to see why the ECB or any other EEA central bank would feel
that it was their responsibility. Could we have an
example—either actual or hypothetical—of where the
Minister believes that another EEA central bank could bail out a UK
building
society?
The
fifth question is this. Assuming that another EEA central bank did want
to bail out a UK building society, can the Minister be confident that
such an intervention would always be in the UK national interest? I
note that the Financial Services Secretary said in the other
place:
“One
of the lessons of the past few years is that we were not able to allow
banking businesses to fail.”—[Official Report, House
of Lords, 18 March 2010; Vol. 718, c.
GC286.]
Given
that, what would happen if the Government and the Bank of England took
the view that some hypothetical building society should be allowed to
fail, only then to have an EEA central bank or the ECB step in and bail
it out? I am not suggesting that that is likely to happen, but the
possibility seems to have been opened up. It would be
helpful to know the Minister’s view on the potential for
intervention—or even rumours of intervention—to conflict
with UK policy towards a mutual. I appreciate that the order is
designed to place building societies on the same footing as banks,
which was also true of the 2008 order, whose provisions were limited to
the Bank of England.
Another
aspect of the order that is worth consideration is the looser criteria
that apply to floating charges. Gone is the condition that charges are
applied only to
assistance
“for
the purpose of maintaining the financial stability of the United
Kingdom,”
although
to be fair, the Minister raised that point. Now any purpose will do.
That makes sense in the context of assistance from an EEA central bank,
but it is nevertheless a significant relaxation, which also applies to
the Bank of England and the Treasury. It seems that we are becoming
rather dependent on the good sense and good intentions of the
qualifying institutions. I would be grateful for a bit more detail on
that.
The
seventh question is this. Can we have some further detail on the
withdrawal of the option to allow floating charges in relation to
settlement banks? The
eighth and final question is this. The reasons provided seem justified,
but given that the consultation document felt that the present system
had unfortunate repercussions for delivery-by-value transactions, it
would useful to know whether the Government regard this matter as
having been settled, which is something that the Building
Societies Association “strongly advocated” in its
response.
As I said, we
do not oppose the two orders, but some significant questions need to be
answered before we can give the Government a carte blanche to introduce
these far-reaching measures. I look forward to the Minister providing
responses to those eight
questions.
4.44
pm
The
Exchequer Secretary to the Treasury (Sarah McCarthy-Fry):
I am not sure I managed to get all eight questions down, but I am sure
that Hansard did. If I do not manage to respond to all of them
now, I undertake to write to the hon. Gentleman on the additional
points.
James
Duddridge (Rochford and Southend, East) (Con):
While the
Minister is marshalling her papers, perhaps she could comment on the
scrutiny role of the Opposition in Committees such as this one. The
hon. Member for Twickenham seems to be quite familiar with television
studios and acting as a commentator on economic affairs, but when he is
put on a Committee that is responsible for scrutinising in detail
matters to do with building societies, he fails to turn up, as does his
hon. Friend the Member for Taunton. Is what the hon. Member for
Twickenham does really an appropriate use of politicians’ time,
or should that be done in addition to the duty in the House to
scrutinise
legislation?
The
Chair:
Order. We have heard what has been said, but it is
not a matter for the Minister to respond to; neither is it germane to
what we are discussing
today.
Sarah
McCarthy-Fry:
Nevertheless, it is telling that there are
no Liberal Democrat Members here to scrutinise the draft orders. I
welcome the scrutiny that the hon. Member for Hammersmith and Fulham
has given to
them.
I
forgot to welcome you to the Chair, Mr. Benton, and I
apologise for that
discourtesy.
On
whether there has been any consultation with any of the European
central banks or European institutions, I will have to write to the
hon. Gentleman, because I do not know the answer. There is no agreement
on reciprocity; these matters would be dealt with on a case-by-case
basis. I undertake to write with a more detailed answer, because I
agree that that is not entirely
helpful.
The
hon. Gentleman asked in what circumstances assistance would be offered.
It is necessary when an institution is in distress and such action is
needed to protect depositors. We are widening basis for financial
assistance so that it is not narrowly confined to maintaining the
financial stability of the UK. The order is intended to assist in
protecting depositors in building societies in the same way as we
protect depositors in banks.
One of the
main questions that was asked was about the wider
order—
Mr.
Hands:
Before the Minister moves on too far,
can I take her back to the first three questions on
the role of the EU? Does she believe that what lies behind
the provision in respect of the EEA central banks is the growing amount
of cross-border ownership? She must be able to tell us something about
what is driving the right of other EEA central banks to intervene in a
bail-out of a UK building society. That has not suddenly arrived out of
thin air. There must be some basis to
it.
Sarah
McCarthy-Fry:
I do not think that I can help the hon.
Gentleman now, except to say that the order was widely consulted on
with the building societies, and they felt that it was important and
appropriate that the provision was widened to include bodies in
addition to the Treasury and the Bank of England. I will write to the
hon. Gentleman with the specific reasons why that was included. I
regret that I do not have that information in my
notes.
Looking
to the wider order, under the special liquidity scheme, the Bank of
England provided recipients with Treasury bills; societies
could then enter into a sale and repurchase agreement in respect of the
bills in order to generate funding. One way that they could do that was
through the CREST settlement system. If we had allowed building
societies to grant floating charges in favour of payment and settlement
systems, it would allow them to access CREST directly. On further
consideration, we were worried that, because of the nature of Treasury
bills and other securities, it would then be impossible to decide
whether the charge related to securities received from a central bank
or other
securities.
The
wider order would have allowed building societies to grant floating
charges in connection with payment and settlement systems, not just in
respect of building societies that were in receipt of financial
assistance. We did not feel that such a fundamental change to building
society legislation was appropriate. However, we have asked the
building societies expert working group to consider whether there is a
way that we could do that that would not have the effect that I
described. We did not want to include that in the order, but further
work is ongoing. There are no immediate plans for additional
legislation, but the expert group has been asked to consider that
matter because, when it replied to the consultation, it was in favour
of the wider order. It was only when we came to look at the matter
later in the process that we realised that it might open things up much
wider than we
intended.
I
regret that I was not able to answer in detail the questions relating
to the EEA banks, but, as I said, I undertake to write to the hon.
Gentleman. I thank him for his
questions.
James
Duddridge:
On a point of order, Mr. Benton. I
apologise for trying to distract the Minister into discussing the hon.
Member for Twickenham. In all seriousness, however, may I ask you to
take up the matter of how hon. Members notified about Committees? I
have been the Treasury Whip for the official Opposition for a year and
a half, and on a number of occasions the hon. Member for Twickenham has
been listed as a Committee
member, but not once has he turned up. Perhaps there is something wrong
in the notification
system.
The
Chair:
That is hardly a matter for the Chair, but let me
put it this way to the hon. Gentleman: what he said has been noted and
will be recorded. Let us leave it at that for
now.
Question
put and agreed to.
Resolved,
That
the Committee has considered the draft Building Societies (Financial
Assistance) Order 2010.—(
Sarah
McCarthy-Fry.
)
4.52
pm
Committee
rose.