Examination of Witnesses (Question Numbers
25 NOVEMBER 2009
Q20 Chairman: There is one final
question on this before I pass to my colleagues. I think I know
the answer to this, but what would have happened if the emergency
support had been disclosed at the time of the takeover prospectus?
Lord Turner of Ecchinswell: At
the time of the takeover prospectus?
Q21 Chairman: Yes.
Lord Turner of Ecchinswell: I
am not convinced that it would necessarily have had any adverse
consequences for the takeover itself because I think that a reasonably
well-informed investor at that time was well aware that, in general,
central banks throughout the world had been very heavily involved
in a full range of the panoply of measures before them and, as
I say, the words that are here are very clear. They have things
like, "If the Bank of England liquidity facility or other
sources of short-term funding are not available, Lloyds Bank,
the enlarged group, could face serious liquidity constraints which
would have an adverse impact on its solvency". The general
warning that there was a significant degree of reliance on the
central bank was absolutely clear at that stage and well understood
by the market. Having said that, I think it is absolutely sensible
that emergency liquidity assistance, when it is provided, is not
revealed and that, having not been revealed at the time, one waits
until conditions have calmed down before revealing it. I think
if you had asked me the question, what would have been the consequence
of revealing on 1 October that the bank had crossed the line from
normal operations to ELA, I think that it would have made a bad
situation even worse. We had pretty much total seize-up in the
money markets of the world in any case, but I think that that
would have really tipped the thing over the edge.
Chairman: I was confident that would
have been the answer!
Q22 Mr Fallon: Mr Sants, just to
be clear, did you approve the prospectus in advance?
Mr Sants: The FSA approves the
Q23 Mr Fallon: You did?
Mr Sants: The FSA obviously approves
prospectuses; it is a listing authority function of the FSA.
Q24 Mr Fallon: But neither prospectus
refers to either the amount or scale of the emergency liquidity
assistance nor refers specifically to that facility at all.
Mr Sants: As I said before, the
practice in prospectuses is to make sure that the material risks
are disclosed and I think that, in the documentation to the Lloyds
shareholders, it was made clear that the enlarged group would
substantially rely, for the foreseeable future on the continued
availability of the Bank of England liquidity facility and so
forth. I am sure you can read that on page 33. It was already
known to the Lloyds executives at that time following their discussions
with the Bank of England that the non-standard facilities would
be switched into standard facilities before the enlarged group
came into being. Therefore, they were making abundantly clear
to their shareholders that the enlarged group would be dependent
on liquidity support from the authorities to survive. I think
the wording there is unambiguous to that effect. They also knew
that ELA would not be the tool being used at the point of the
creation of the group. So, that seems to me to be a wholly reasonable
disclosure. At the end of the day, I would make the point, however,
that the obligation for disclosures rests with the issuers and
not with the FSA. Nevertheless, I think that wording is reasonable
in light of the information that Lloyds executives had at the
time and the conversations they had with the Bank of England.
Q25 Mr Fallon: Do you think it is
reasonable that the amount and scale of the funding should be
concealed from the shareholders, that a figure of £25 billion
should be concealed from the shareholders? Do you, the FSA, think
that is reasonable?
Mr Sants: It is practice in listing
Q26 Mr Fallon: What the prospectus
discloses is the access. It does not disclose either the amount
or the scale of this funding. Why do you think that is reasonable?
Mr Sants: That is not the case.
It makes completely clear that HBOS is dependent on Bank of England
funding and it makes completely clear, particularly in the HBOS
documentation which was available before the shareholder vote,
that, without that funding, it was likely that the company would
be insolvent. The wording to that effect is completely clear.
Q27 Mr Fallon: Where on page 19 does
it refer to £25 billion?
Mr Sants: I am looking at the
HBOS prospectus at page 19 where it says, "The HBOS Group
could face serious liquidity constraints which would have a material
adverse impact on its solvency in the absence of UK Government
taking appropriate action to support the HBOS Group liquidity
... " et cetera, et cetera.
Q28 Mr Fallon: But there is no reference
to the £25 billion.
Mr Sants: There is no numerical
reference to the £25 billion which is actually no more than
I think 4% of the gross balance sheet of HBOS, but the risk that
the shareholders faced is absolutely abundantly clear. As I say,
the obligation at the end of the day does rest on the company
and not the FSA, but I think anybody reading this understood fully
that HBOS was dependent on central funding.
Q29 Mr Fallon: So, the risk was large
but the amount was trifling.
Mr Sants: The risk was clearly
described, which is the purpose of a prospectus, and I feel that
the Lloyds shareholders were fully aware of the funding risk that
the enlarged group would face.
Q30 Jim Cousins: Just following up
Mr Fallon's point, do you not think that the prospectus should
have made clear that a sum far in excess of £25 billion had
been handed over to the Bank of England as collateral? Do you
not think that the disappearance of the assets into the control
of others was a fact that needed to be disclosed?
Mr Sants: Those obligations are
also covered in the working capital statements and I think that
the overall set of risk disclosuresand we can go through
each one in detail if you likemake very clear that, without
the central authority's liquidity support, HBOS and the enlarged
group would not be a viable entity and I think that the HBOS shareholders
and the press commentary at the time
Q31 Jim Cousins: Excuse me, Mr Sants.
Can you draw my attention to where in the Lloyds prospectus was
the fact that Lloyds was about to merge with a bank that you have
just said was not a viable entity without that liquidity support?
Mr Sants: I think it is reasonable
for the shareholders to be making the judgment on all the public
information available at the time, but I draw again your attention
to page 33 and page 13.
Lord Turner of Ecchinswell: If
you look at page 13 of the Lloyds TSB proposed placing offer,
so this is, I think, the document of 18 November, and in addition
Q32 Jim Cousins: Lord Turner, you
will have the opportunityand I hope you willof supplying
the Committee with those words which are to be found buried in
Lord Turner of Ecchinswell: You
did just ask us to point you towards them.
Mr Sants: You asked us where they
Lord Turner of Ecchinswell: I
think you did actually just specifically ask us, could you point
us towards them. Are you saying that you do not want us to point
you towards them because you did just specifically ask us?
Q33 Jim Cousins: You have pointed
us towards them and we will have the opportunity of reading them
Lord Turner of Ecchinswell: Right,
the pointing has been adequate!
Mr Sants: I do not think they
are buried. These prospectuses and documentation are produced
specifically for investors to make informed judgments on transactions.
That lies at the heart of the European disclosure base prospectus
regime. To describe these documents as ones in which information
is buried is to completely misrepresent the communication exercise
that they are designed to achieve.
Q34 Jim Cousins: Yes, of course we
must bear in mind that we are not here just to consider the interests
of very sophisticated people but quite unsophisticated people
as well. Mr Sants, in the summer of 2008 you had banned short
selling in banks. Why did you not take measures of a similar robustness
to protect the interests of the ordinary shareholders?
Mr Sants: As I think we have made
abundantly clear, and the words which we have drawn to your attention
are explicit, the risks are properly disclosed in these prospectuses
and the role of the FSA is to sign off on prospectuses. The ultimate
responsibility for the content of the prospectus lies with the
firm and its issuers, but I am answering the question and I think
those risks are adequately disclosed, and that is our position
and I personally think that it is a perfectly reasonable position.
I think it is a sad day if you think that the thousands of stockbrokers
out there servicing the retail community and all the many financial
journalists are not reading the prospectus.
Jim Cousins: Clearly, you expect people
to rely on those stockbrokers rather than on you. The changes
were not the changes to the Market Abuse Directive but the clarification
of what the Market Abuse Directive meant in the British context.
Chairman: Can you give us a brief answer
because we do want to move on.
Q35 Jim Cousins: When did that actually
happen because that was the difference between not having a covert
operation with Northern Rock and having one for this?
Lord Turner of Ecchinswell: We
issued a consultation paper in July 2008.
Q36 Jim Cousins: A consultation paper?
Lord Turner of Ecchinswell: Yes,
but we were effectively applying that policy thereafter which
we are able to do.
Q37 Jim Cousins: When was the consultation
paper formally concluded and the relevant formal clarifications
Lord Turner of Ecchinswell: The
formal rule came into place on 6 December 2008.
Mr Sants: But we should make it
clear that we were already applying that policy because it was
a clarification and not a substantive change.
Q38 Jim Cousins: Let us be clear.
The formal clarification of the position about the Market Abuse
Directive which the Governor of the Bank of England believed made
a covert operation to support Northern Rock to be impossible and
a covert operation to support HBOS and RBS to be possible was
not formally in force until December 2008 after these covert operations
Lord Turner of Ecchinswell: Yes,
but if it is a clarification that our understanding of the law
is that there is not a limit on operating covert operations, then
it is legal to undertake covert operations before that clarification
because the clarification is basically saying, "Yes, we are
clear that you are able to operate in a covert fashion".
Mr Sants: Also, I did not want
to go back over the entire Northern Rock debate. Can I say quite
clearly that the circumstances pertaining to the Governor's views
on Northern Rock were not the same as those pertaining to Lloyds
and HBOS. If you wish me to spend another ten minutes going back
over that again, which I have done a number of times, I would
be happy so to do.
Chairman: We went over it in our report
quite well and we are very familiar with that.
Q39 John Thurso: The core of this
issue is not about the use of covert action. It was something,
as we just said, that was called for. The core of this issue is
the fact that a major piece of covert action was taking place
at a time when a major transaction between two banks was also
taking place. The timeline is that, on 17 September, Robert Peston
broke a story that Lloyds and HBOS were conducting merger talks.
On the 18th they announced it and on 1 October the covert action
started. The Governor made it clear in his evidence yesterday
that covert action or ELA is a bridge from a particular place
to a resolution and he listed them and that was not terribly important,
the point is that it is a bridge. You have asked us to accept
that, I think your words were, thousands of stockbrokers and a
whole community of financial journalists knew about this but were
happy to be silent about it. I find that completely incredible.
The questions that I put last year to the Chancellor were about
this merger and he answered by saying that there was nothing the
Government could have done to have made that merger go ahead if
the shareholders had not wanted it. He said that it was entirely
a commercial decision. When I asked Mr Eric Daniels about it,
he said it was something that made good sense. The shareholders
had the right to a substantial piece of information which might
have changed their point of view. Do you really think it is acceptable
for the regulators to have permitted that transaction with this
huge piece of information absent?
Lord Turner of Ecchinswell: It
does depend here on how you interpret these words, but I have
to say that the statement that it expects the enlarged group to
substantially rely for the foreseeable future on the continued
availability of Bank of England liquidity facilities and that,
in the event that these are not available, the Lloyds Bank Group,
the enlarged group, could face serious liquidity constraints which
would have a material adverse impact on the solvency of the group
are pretty in-your-face words. There are not many disclosures
which say, "There is something out there which could have
a material adverse consequence for the entire solvency of a firm".
Those are pretty strong words.